One type of microgrid technology is a fuel cell, such as this Bloom Energy Server at the six-acre (2.4 ha) DreamWorks SKG animation headquarters in Glendale, California. Fuel cells power the campus by converting fuel into electricity through an electrochemical process that is cleaner than thermal combustion. (Bloom Energy)

Power reliability is becoming an increasingly important consideration in real estate development, and that is causing some property owners and managers to seek more stable and secure power systems such as microgrids—self-sustaining power generation systems that are connected to the traditional utility power grid but which are capable of running independently from it when necessary.

Some homes and businesses already have backup generators to cover power outages, but microgrids differ from those backup systems in their ability to provide uninterrupted power. Also, because microgrids are often developed with renewable energy sources such as solar or fuel cells, they can offer greater flexibility, energy efficiency, and cost savings compared with those offered by the traditional utility grid or backup generators, which typically are powered by diesel fuel.

“The idea of producing your own power and doing it more cleanly is more attractive to a lot of businesses and institutions today,” says Andrew Mulherkar, a power grid analyst with GTM Research, an alternative-energy information company that researched the North American microgrid market in 2014. “This is catching on.”

The largest private real estate project in the United States, the 17 million-square-foot (1.6 million sq m) Hudson Yards project under construction in New York City, is among the newer developments planning to incorporate a microgrid, which will eventually power its first three buildings. If another Superstorm Sandy hits the East Coast—or if any storm blows down power lines and causes a power outage—it will not affect the electricity supply to Hudson Yards.

Typically, a microgrid—such as Solar Grid Storage’s system at the Philadelphia Navy Yard—includes energy storage for use of electricity when needed later, such as in the case of a power outage. (Solar Grid Storage)

“We want Hudson Yards to represent what a 21st-century neighborhood should be, which is efficient, resilient, reliable, and constantly connected,” says Charlotte Matthew, vice president of sustainability for the Related Companies, the project’s developer along with Oxford Properties Group. “We want a large-enough system on site in case the grid goes out, so we can keep Hudson Yards sort of a beacon of New York City.”

Historically, microgrids had been used as a power supply only for remote communities, such as island populations. But in the past few years, some institutions that need uninterrupted power, such as military facilities, public-safety operations, and health systems, have been adding microgrids, and their use is expanding to commercial offices, industrial facilities, and grocery stores.

GTM Research forecasts that microgrid investments, while still small compared with other power sources, could jump fivefold—from $133 million to $671 million—from 2014 to 2017. Another research firm, Navigant Consulting, foresees microgrid power generation in North America soaring fivefold (in terms of megawatts) from 2013 to 2020.

This growing interest is driven by fears of power outages caused by extreme weather along with the increasing attractiveness of renewable systems because of falling prices for solar and battery storage solutions. The number of reported U.S. power outages in 2013—the latest year for which data are available—reached a record 3,236, or more than 60 every week across the country, according to a blackout tracking list compiled by Eaton Corporation, a power-management products company.

When blackouts hit the University of Florida’s Shands Hospital in recent years, it was ready. The academic medical center in Gainesville was built in 2009, and the university wanted it to have more than the traditional backup power supply. So the hospital campus was developed with a $45 million microgrid that is connected to the utility grid, but it can isolate itself from the grid whenever necessary. The grid went down on two occasions, and on both the microgrid automatically took over with just a flickering of the hospital’s lights. “The occupants of the hospital didn’t even notice it,” says Brad Pollitt, vice president of facilities for Shands. “Every outlet stayed on, and that’s what you need.”

Power Hazards

The University of Florida Health’s Shands Hospital, a gas-fired turbine generator is connected to the local utility grid to power the facility. If the utility grid fails, the generator automatically switches to a microgrid “island mode” that can power the facility on its own. (University of Florida Health)

In 2013, the federal government issued a report that estimated that outages caused by harsh weather alone cost the U.S. economy $18 billion to $33 billion a year. In that year, according to Eaton’s blackout tracking list, the average power outage affected 6,500 people, with California, Texas, and Michigan the hardest-hit states. Since Eaton began tracking power outages in 2009, the annual number in the United States has increased 14 percent.

In response to these increasing disruptions and growing concerns about cyber security, the U.S. Department of Energy partnered with several federal agencies to create the Smart Power Infrastructure Demonstration and Energy Reliability and Security (SPIDERS) project with microgrids at military sites. SPIDERS is a three-year, $40 million, multiagency initiative to develop fully functioning microgrids—in which critical loads could be maintained for at least three days—at three military facilities in the United States in case a cyber attack shuts down the grid. The last of the three systems is scheduled to be completed in 2015.

In addition, the East Coast states of Connecticut, Maryland, Massachusetts, New York, and New Jersey have launched microgrid funding programs or demonstration projects in the last couple of years. In 2014, New Jersey created a $200 million infrastructure bank focused on energy-resilience projects such as microgrids at public facilities.

“When there are prolonged outages, there’s a breakdown in the social fabric. People can’t get to the pharmacy for medicines or to the grocery store or to the bank,” says Abigail Ross Hopper, the director of the Maryland Energy Administration who headed a state task force last year that recommended policy changes to promote microgrids. “We are interested in how to keep the social fabric intact.”

Microgrids, though, are still in the early development stage. GTM Research compiled the first-known comprehensive list of microgrids and found fewer than 100 systems currently in operation across the United States. More than half of the installations have been at universities and military facilities. There are microgrids at the University of California–San Diego, Michigan State University, and Princeton University in New Jersey, to name a few. And the U.S. Department of Defense has installed demonstration projects at Eielson Air Force Base in Alaska, Robins Air Force Base in Georgia, and Fort Bragg in North Carolina, among other facilities.

But the small numbers mask the growth trajectory. Most of today’s microgrids have been installed just since 2011, prompting GTM Research to observe the following: “The increased number of project initiations in the past three years is a harbinger of faster long-term growth.” Indeed, based on current proposals and plans, the number of microgrids in the United States could double in the next few years.

Though universities and the military continue to be the leading adopters, microgrid projects are beginning to make inroads into local government institutions and commercial real estate developments. The Connecticut town of Woodbridge, for example, is creating a microgrid to power its police and fire stations, town hall, and high school. New York City is building a microgrid at its Rikers Island jail complex. And New Jersey Transit has received a federal grant of $410 million to develop a giant microgrid for its entire rail system.

In real estate, property developers have started experimenting with microgrids in select office buildings, and microgrid developers have seen burgeoning interest from commercial properties with large electricity appetites, such as data centers, industrial warehouses, and big-box retailers.

“They have begun to understand that they face an open-ended risk by relying on the grid,” says Asim Hussain, senior marketing director of Bloom Energy, a California-based power generation technology company specializing in fuel cell–microgrid systems. “They have very little control over their electricity rates, and they’re increasingly exposed to reliability risks. They want alternatives.”

In Laurel, Maryland, a suburb northeast of Washington, D.C., Konterra Realty has been developing a 2,000-acre (809 ha) mixed-use residential/office project. When Konterra planned its first office building, a consulting partner suggested combining solar power with a microgrid. “We really didn’t know what that was,” recalls Rich McCoy, a Konterra executive vice president. Konterra was persuaded to try it because of the promise of sustainable power. So its six-story, 125,000-square-foot (11,600 sq m) building, completed in 2013, included a solar-covered parking lot connected to a microgrid. The $2.5 million microgrid provides about 20 percent of the building’s power on a daily basis but can keep critical systems operating if the utility grid goes down.

“It’s cutting-edge, and we like to be an early adopter,” McCoy says. “It’s appealing that we can be off the grid if need be and still function.”

Building Momentum

One of the largest-scale microgrids planned in the United States is proposed for New York City’s Hudson Yards. The project’s first three buildings include the 10 Hudson Yards office tower, which will incorporate a microgrid to provide power in case of outages. (the Related Companies)

Superstorm Sandy serves as the poster child for the appeal and benefit of stable, uninterrupted power. While that storm in 2012 caused power outages for 10 million utility customers in 24 states from Maine to Florida, an emergency shelter at South Windsor High School in South Windsor, Connecticut, was powered by a microgrid. In addition, Princeton University was able to stay powered up and serve hot meals for two and a half days until utility power was restored. And at a New York City housing cooperative called Co-op City, its self-contained central plant was able to keep the lights on for 60,000 residents in dozens of high-rise buildings and townhouse clusters.

But reliability is hardly the only advantage of a microgrid. More than half of all planned microgrids are expected to incorporate solar power, which promises more energy efficiency than a typical building power system. Plus, many microgrids include the ability to sell excess electricity back to the utility grid, which can reduce a facility’s utility bill. For instance, Princeton’s microgrid draws electricity from the utility grid at night, when kilowatts are priced lower. Then it stores that power to use at its research laboratories and dining halls during the day. This process has resulted in a 10 to 15 percent savings in the university’s energy bill, according to GTM Research.

Still, the growth of microgrids faces a few challenges. One is cost. GTM Research found that projects typically cost between $1,000 and $4,700 per kilowatt, usually adding up to several million dollars for any system larger than one megawatt. Moreover, the return on investment can take a decade or more. For instance, power systems software developer ETAP Corporation built its own microgrid plant for $1.1 million in 2013, and, by the company’s estimate, the anticipated energy savings could lead to a 15-year payback period.

As a consultant report for the Massachusetts Clean Energy Center explained in 2014: “Developing a compelling business case for a microgrid can be a significant challenge.”

Then there is the tricky issue of utility regulations. In many states, utility franchise rights question or limit the ability of nonutilities to operate power-generating systems and transmission lines serving more than one facility or customer.

Microgrid proponents, though, are optimistic that momentum is on their side.

Some regulatory frameworks are starting to evolve in ways that support commercial projects. Maryland Energy Administration’s Abigail Ross Hopper, for one, notes that “there are a lot of statutory pieces, but none of them are insurmountable. I think there’s political will because consumers are demanding more [power] reliability.”

A row of Bloom Energy high-efficiency fuel cell servers provides the primary on-site power source for this eBay data center in Utah, allowing eBay to forgo large and expensive backup generators. The local community’s electric utility grid serves as the backup power source rather than the primary power source. (Bloom Energy)

Also, the microgrid industry is beginning to develop financing packages to make projects more affordable. Types of financing structures include power-purchase agreements, in which an outside third-party vendor finances and owns the power system, and performance contracting, in which there are no upfront costs to the facility and the financing is based on anticipated energy cost savings. A normal microgrid project involves collaborations with five or more funders and technology partners, according to GTM Research. For instance, San Diego Gas & Electric’s five-megawatt microgrid for the small California community of Borrego Springs cost $15.2 million, with the utility paying half and the other half coming from the U.S. Department of Energy and a half-dozen private sources.

“The trick is: how do you make the numbers work?” says Tom Leyden, chief executive officer of Philadelphia-based Solar Grid Storage, one of the new crop of companies developing commercial microgrid systems. “The industry is innovating and creating financial models to address this.”

The bottom line: The microgrid market is still in its infancy. It is such a new concept in commercial real estate that property managers do not know yet how to value it—that is, how to use a microgrid as a selling point or incorporate it into rents. Yet, at many properties that have installed microgrids, the real estate executives swear by them.

At a master-planned community called Mesa del Sol in Albuquerque, New Mexico, a microgrid was incorporated in its first commercial building, the 78,000-square-foot (7,250 sq m) office/retail Aperture Center. It was a marriage of happenstance—Mesa del Sol wanted to set an example as a sustainable development, and it was approached by Japan’s New Energy and Industrial Technology Development Organization, which was looking for a demonstration project in the United States. The result was a $22 million solar- and natural gas–fueled project that involved more than a dozen local, state, and Japanese partners. Now it powers almost one-third of the building on most days, and kept the lights on after one severe storm knocked out electricity from the utility.

Related Companies’ MiMA high rise has Dog City on the third floor, offering specially designed indoor and outdoor play spaces, along with dog services ranging from veterinary care to grooming and massaging. (The Related Companies)

Third North Apartments opened in downtown Minneapolis in December with the usual modern amenities to attract high-end tenants: underground parking, a swimming pool, an outdoor fire pit, a fitness center, and a private party room, plus ­stainless-steel appliances and granite-topped kitchen islands. But the building also features something a little more unusual to stand out in the marketplace: a dog-washing room.

It is a small room off the garage that includes a stainless-steel tub with a sprayer hose alongside a table with a blow-dryer. So far in Third North’s young life, management has determined that 55 percent of the tenants have pets, so the dog-washing station gets used every day.

“When we’re showing the building to prospective tenants, nine out of ten times we’ll be asked if we’re pet friendly,” says property manager Mary Swanson. “It gives us an advantage because we have a few more amenities than some of the communities in our area.”

City Market at O apartments in Washington, D.C., have a 200-f00t-long (60 m) rooftop dog park with a water fountain and fire hydrant. (City Market at O)

Welcome to a new frontier in multifamily housing: pet-friendly accommodations. Cities have been developing dog parks for years, and the retail industry has long catered to our four-legged friends with doggy daycare, dog clothing, and even yoga classes that people can take with their dogs. Finally, the real estate industry is beginning to catch up. Apartment and condominium developers from New York City to Washington state are incorporating pet amenities like grooming stations, day boarding facilities, dog-walking services, veterinary clinics, miniature dog parks, and even rooftop dog walks with special cleaning systems.

“One of the ways to be successful in this business now is you have to be pet friendly. It creates a larger target market for your community,” says William MacDonald, chief investment officer for apartment owner Mill Creek Residential in Maryland and chairman of ULI’s Multi-Family Council (Gold Flight).

This trend took off as real estate recovered from the Great Recession. According to developers and market observers, a new wave of multifamily projects started to cater to populist lifestyles. Out went frou-frou features like cigar and wine rooms, and in came more social and communal amenities like craft rooms, gardens, and pet spaces. Some industry research has found that about 10 percent of apartment or condo residents will consistently use a fitness center, and fewer than that will use a community or party room. But pet amenities tend to be used every day, and sometimes more than once.

“What has changed is the mind-set of developers,” says Marian Schaffer, founder of Southeast Discovery, a web portal for retirement and second-home real estate. “Prior to ’07, the buzz was who could build the biggest clubhouse and pool, who could wow the consumer the most. Today, it’s all about what’s most practical and what will be used the most.”

Denver-based urban apartment developer UDR has been at the forefront of providing pet-friendly features. Jerry Davis, the company’s chief operating officer, estimates that almost half of UDR’s renters nationwide have a pet, so one-third of the company’s new developments since 2007 have included some pet accommodations. One such development is downtown Seattle’s Olivian, a 27-story high rise with an artificial-turf pet park on the 26th floor’s outdoor terrace, plus a 6,000-square-foot (557 sq m) ground-floor retail space called Citydog that offers boarding, grooming, and five indoor pet play spaces.

“It’s like dropping your kid off at daycare,” Davis says of City Dog. “It’s a huge amenity and it’s also a way to attract more residents.”

Minneapolis’s Third North Apartments, a luxury building with 117 units, has a dog-washing room off the underground parking garage that includes a stainless steel tub for washing and a table for drying and grooming. Prospective tenants sometimes bring their pets to check out the building’s amenities, which include an outdoor dog run. (Third North Apartments and Tom Witta)

Becoming Welcoming

Not long ago, many apartment and condominium buildings did not want to attract residents who had pets. Plenty of properties banned pets outright. But that has been slowly changing, driven by record levels of pet ownership and shifting U.S. demographics, in which the ranks of empty nesters are growing and more young people are getting married later and delaying having children. Pets are filling the voids of companionship.

In the United States, pet ownership has been steadily rising for decades. The number of households owning at least one pet jumped 35 percent during the past decade to 74.1 million, according to the U.S. Pet Ownership & Demographics Sourcebook, published by the American Veterinary Medical Association. Dogs are America’s favorite pet, with 43.3 million households owning one, and dog ownership is surging among singles and renters.

From 2006 to 2011, the latest year for which data are available, dog ownership increased 39 percent among women living alone, 48 percent among men living alone, and 46 percent among apartment renters, the association found.

America’s obsession with pets is hardly new. What is new is the multifamily industry’s response. A decade ago, a survey of tenants across the country by the Foundation for Interdisciplinary Research and Education Promoting Animal Welfare found 82 percent of pet-owning respondents had trouble finding a rental unit that welcomed pets. “The lack of available pet-friendly rental housing is puzzling when one considers the high numbers of U.S. households with companion animals,” the Massachusetts-based foundation concluded in a 2005 report.

“I’m not sure as an industry that we’ve done the best job in the past of catering to pet owners,” says Sean Breslin, chairman of ULI’s Multi-Family Council (Blue Flight) and executive vice president for investments at AvalonBay Communities, an apartment developer and manager based in Arlington, Virginia. “Now the younger generation has more pets, and they put more value on the social interaction that comes with having pets.”

In Washington, D.C., when Roadside Development was planning a multi-block apartment complex called City Market at O, it held focus groups with people under 35 years old. Based on that feedback, Roadside included amenities like a grocery store, a game room, outdoor fire pits—and a rooftop dog park that is 200 feet (60 m) long with separate sections dedicated to dogs of different sizes. A dog-washing station is nearby.

“We wanted to differentiate ourselves,” says Richard Lake, a partner in Roadside, which opened City Market at O late last year. “Having these amenities will keep tenants here longer.”
Claudia Gerster, principal with Phoenix-based Creative License International, helps residential developers with branding for new projects. “When we worked with multifamily developers ten years ago, it was, ‘We don’t allow pets,’” says Gerster, who is also a vice chair of ULI’s Community Development Council (Blue Flight). “Now being pet friendly is part of our conversation.”

Dog Pools and Cat Rooms

Whereas the United States has been a bit behind the curve on pet friendliness, it has long been the rage in Japan. There, special dog doors and scratch-resistant flooring are common. Japan’s Fauna+Design remodeled one small Japanese home to accommodate a large Labrador retriever by placing a children’s playroom on top of an indoor kennel; FORM/Kouichi Kimura Architects of Japan created an under-house dog space reached from the backyard that resembles an American walk-out basement, only for a dog.

In the United States, pet-friendly additions are turning up in the single-family sector, too, both outside and inside homes. Master-planned communities have added dog parks as a must-have convenience. The Hampton Lake community, near Hilton Head Island in South Carolina, has Dogpaddle Park—a fenced park with sand pits, dirt mounds, and even a red fire hydrant with a shower to help Fido cool off. Brookfield Residential’s Playa Vista, a decade-old mixed-use community outside Los Angeles with 7,000 residents, has added two dog parks, and two more are planned.

“It’s definitely a competitive advantage to be so welcoming for dogs,” says Alison Banks, marketing director for Brookfield Residential.

ProMatura, a Mississippi-based real estate research and advisory firm specializing in age-qualified housing, surveys seniors every year on what they want in their housing communities. In last year’s survey, 43 percent of respondents indicated they thought a dog park was essential or desirable, up from 33 percent the previous year.

“Five years ago, it was rare that we’d even think about asking about a dog park,” says Margaret Wylde, ProMatura’s chief executive officer and chair of ULI’s Senior Housing Council. “Now, almost every developer is thinking about a dog park. They’ve become much more a staple in communities.”

Meanwhile, architects and contractors are increasingly incorporating pet amenities in the design of individual homes. Among these features are rooms with pet-sized furniture, custom-built cabinets for food bowls—even nooks with heated window seats. Rhona Sutter, a Florida real estate agent, says she has shown a house with a dog pool separate from the people pool.

“It’s quite amazing what some people are doing now and what they are demanding,” says Sutter, who runs a series of websites called the Pet Realty Network to help people find pet-friendly housing. “It’s something buyers really think about now when they build. Pet friendly has come into the forefront of consideration.”

As for other pets, homebuilder Brookfield Residential has introduced a “cat room” option in La Vita, its new Irvine, California, neighborhood. The room, part of a laundry room, features a specially designed cabinet with space for a litter box and supplies, all confined behind a curtain for felines that prefer privacy. The idea came from Brookfield senior marketing director and pet owner Mercedes Meserve. “I know from experience after remodeling my own home that it’s important to accommodate the needs of all members of the family, so to speak,” Meserve says.

At the MiMa highrise in midtown Manhattan, the Dog City complex, which offers a variety of services, helps attract pet-loving tenants. (The Related Companies)

Pet Profits

Still, it is in the multifamily sector where pet accommodations are making the biggest splash, and more accommodations cater to dogs because they require more services.

The Austonian, a 56-story luxury condominium high-rise in Austin, Texas, has a dog-grooming room and a 600-square-foot (56 sq m) outdoor dog park on a tenth-floor terrace. A midtown Manhattan high rise called MiMA has a dog-only pool in the shape of a bone, plus several pet services bundled together in an interior complex called Dog City, providing everything from dog playgrounds to dog play dates, from behavioral training to geriatric care for elderly dogs.

The concept for Dog City emerged after MiMA’s owner, Related Companies, determined from tenant research in its other high rises that 60 percent of residents have a dog. “You’re always looking at the data from your buildings and challenging yourself: ‘What can we do that’s better?’” says Daria Salusbury, Related senior vice president of leasing. “For MiMA, we really drilled down to what’s important to residents with a dog.”

Pet accommodations, like any amenity, do incur extra upfront investments and maintenance costs. Some buildings add insulation between walls and floors to muffle pet noises, particularly barking, and a grooming room with a tub and running water can cost a few thousand dollars to build. Many of the rooftop dog parks are made of porous artificial sod with drainage and sprinkler systems both above and below the sod. The sprinklers are turned on several times a day to wash away any waste and odors.

But properties recover these expenses with special pet fees. At the new four-story Savier Street Flats in downtown Portland, Oregon, pet owners put up a $300 deposit and then pay an extra $40 monthly fee. At City Market at O in Washington the additional deposit is $500 for one pet and $800 for two, and the monthly fee is $60. Says Joel Regignano, City Market’s general manager, “The income we get is far more than the cost to maintain or clean up after pets. It’s absolutely a good return on investment.”

Pet-friendly accommodations are now an increasingly popular differentiator in multifamily housing—to the point that some observers wonder whether they will spawn a backlash. After all, not everyone likes hearing a dog barking next door. So, as more housing developments welcome pets, will some other developments pursue a market niche in the other direction, as pet-free?

“There’s potential for a negative backlash, certainly,” says MacDonald. “The last chapter has not been written yet.”

Jeffrey Spivak, a senior market analyst in suburban Kansas City, Missouri, has been writing about real estate, development, and infrastructure issues for more than 20 years.

This wall-mounted box—measuring six inches by seven inches, roughly the size of a hardback book—may be unobtrusive, but it’s powerful. As a telecommunications “small cell,” it is responsible for vastly improving cellphone reception and download speeds inside buildings. (Alcatel-Lucent)

Just about everyone has experienced it. You’re in an office building and your mobile phone connection plummets from four bars to barely one, making reception spotty. Or you are at a sporting event, trying to post a picture to Facebook from your phone, and it’s not working. Or you’re at a convention and your phone shows four bars, but you still cannot make a call or retrieve e-mail.

It can be frustrating and bewildering. But some emerging solutions are being embraced in commercial real estate. Building owners and telephone carriers are installing customized telecommunications systems to improve cellular phone service, fill in coverage gaps, and provide better emergency communications capabilities. The companies are making these investments—which can range from tens of thousands of dollars to several millions of dollars—to satisfy customers, retain tenants, and, in some cases, even generate extra revenue.

Telecom equipment called a distributed antenna system—known as DAS—is being mounted at stadiums, airports, universities, hospitals, convention centers, high-rise towers, and other large-scale properties where thousands of people gather daily or occasionally. Meanwhile, smaller-scale products called femtocells, picocells, and metrocells—collectively known as “small cells”—are gaining favor in office buildings, hotels, industrial warehouses, shopping centers, and other facilities where better phone service is not just a desire, but a demand in today’s smartphone culture.

“The mobile phone has become such a critical part of everyday life that any office or retail space that doesn’t support a mobile phone is really going to suffer,” says Andy Germano, vice president for the Americas at the Small Cell Forum, an industry association that promotes the adoption of telecom improvements. “Some business owners realize that if they want to attract tenants, they need better coverage. It could be the difference between tenants coming in or not coming in. We’re just at the tip of the iceberg in terms of understanding, education, and wider deployment.”

It is an issue intertwined with real estate. The telecom industry estimates that 60 percent of mobile calls and 70 percent of data usage occur inside buildings—and that is where problems crop up. According to a recent survey done for telecom systems provider SpiderCloud Wireless, 61 percent of larger U.S. offices have noticeably poor indoor cellular reception. Similarly, a recent survey conducted for the Washington, D.C.–based National Multi

Small cells are used in a variety of interior building settings, from warehouses (pictured here) to grocery stores, to improve cellphone coverage and capacity. (Alcatel-Lucent)

Housing Council found that more than one-third of respondents in large apartment complexes felt cell reception was weak or spotty. More than 150 municipalities now mandate consistent wireless coverage in large buildings so that public-safety responders can communicate anywhere inside.

In the past, phone companies tried to handle such needs by simply building more cell towers. But they cannot keep up with phone usage demands. Many buildings already have wi-fi service, but that does not work for phone calls. So the market for DAS and small-cell solutions in new and existing buildings is forecast to skyrocket in coming years. Real Wireless, a U.K.-based independent wireless consultancy, predicts that DAS and small-cell usage will spread from about 2 percent of all medium and large buildings worldwide to 35 percent in the next dozen years. In the United States alone, the combined number of DAS and small-cell installations is predicted to soar more than tenfold from 116,000 this year to 1.5 million in 2020.

“There’s definitely more awareness and planning for cellular coverage, but it’s an education process,” says Doug Lodder, vice president of business development for Los Angeles–based Boingo Wireless, which installs DAS systems. “DAS and small cells aren’t exactly household words yet.”

DAS has been making inroads at sports stadiums such as Soldier Field in Chicago; at airports such as Los Angeles International Airport; on college campuses such as the University of Kansas in Lawrence, Kansas; and at office buildings such as the Empire State Building in New York City. Small cells are only beginning to hit the buildings market, with installations at hotels such as Starwood Hotels and at warehouses such as those serving furniture retailer Rooms To Go.

Dallas-based Granite Properties has installed small cells in six of its 28 mid-rise office locations across the country, mainly to boost cellular reception in sections of the buildings. But the company has not passed along the costs—which are in the tens of thousands of dollars—back to tenants, according to chief executive officer Michael Dardick, who is also assistant chairman of ULI’s Industrial and Office Park Development Council (Gold Flight).
“The trend is clear: We’ve gotten to the point where everyone wants to use their phone everywhere,” Dardick says. “But is it something they expect wherever they are, or something they’re willing to pay for? We still have to find that out.”

Coverage and Capacity

A more powerful solution to improve cellphone reception is called a distributed antenna system, or DAS. It can improve phone service over a larger expanse of space, inside or outside. A DAS was installed at Chicago’s United Center arena, and one of the system’s antennas is embedded in the box atop the exit sign. (Connectivity Wireless)

Like many college campuses, the University of Kansas has plenty of cellphone dead spots. Some historic buildings have masonry walls three feet (0.9 m) thick, blocking phone signals, and some points on the 1,000-acre (405 ha) campus are too far from a cell tower. In these cases, cellphone reception drops from four bars to one or none. These are cell “coverage” issues.

What can be just as maddening, though, are network “capacity” issues, which arise when too many people are trying to use their phones simultaneously. These can occur at inopportune times, such as when 16,000 fans pack the university’s Allen Fieldhouse to watch the highly ranked Jayhawk men’s basketball team. Their phones may show four bars, but too many people are calling, texting, or posting at the same time, so the calls, texts, and posts don’t go through because the nearest cell tower cannot handle them all. “Virtually everyone on campus has experienced that,” says Jeff Perry, the university’s deputy technology officer.

As a result, the university recently announced a project to deploy a DAS network. It involves dozens of antennas installed on the roofs of buildings, along with a custom system inside Allen Fieldhouse. This design is expected to cover 90 percent of indoor spaces on campus and provide a 20- to 30-fold increase in the university’s cellular capacity. In addition, the university will earn a small amount of revenue from leasing space to the phone carriers for their DAS equipment.

“This isn’t about making big money. It’s about making our properties more modern,” Perry says.

Indeed, people increasingly view five bars not as a luxury but as an essential amenity, like utility services. “In addition to plumbing and electricity, it’s something people count on now,” says Tracy Ford, director of the HetNet Forum at PCIA–the Wireless Infrastructure Association, an industry trade group.

Yet phone companies can hardly keep up with the demand. For example, AT&T notes that mobile data usage on its network alone soared 30,000 percent from 2007 to 2013. Going forward, mobile data traffic from phones, tablets, and laptops is predicted to grow sevenfold in North America between 2013 and 2019, according to a new report from communications company Ericsson. The main reason: greater use of streaming video, from YouTube to TV shows.

Streaming videos on your phone inside modern buildings is already tough because wireless signal strength decreases as it travels through walls and windows. Yet the challenges are getting even tougher, according to a study last year from Real Wireless. For instance, some popular green building features, such as low-e glass with metalized coatings, tend to slow cellular penetration within buildings. “I don’t think a majority of people realize that green features impact cell service. That was a surprise to me,” says Rick Haughey, vice president of industry technology initiatives for the National Multi Housing Council.

Return on Investment

Like with small-cell boxes, DAS antennas are designed to be small and unnoticed in interior settings. In this plush upstairs lobby inside the United Center, a DAS antennais the white rounded mound in the ceiling tile betweenthe speaker and the lights. (Connectivity Wireless)

DAS and small cells will increasingly fill the need for better wireless service. But the two systems are entirely different.

DAS creates wide zones of coverage using multiple antennas connected to a base station hub by fiber or copper wiring. The antennas—as small and unnoticeable as a smoke alarm—are usually affixed to ceilings, and each can cover 5,000 square feet to 25,000 square feet (465 to 2,300 sq m) of space. The base station requires a separate room with upwards of 50,000 square feet (4,600 sq m) for the equipment.

The main benefits of DAS networks are the large coverage areas involved, such as stadiums and university campuses, and the ability to incorporate connections with multiple phone companies. But DAS can take several weeks to install, and it can be costly. Installation cost can range from $1 to $5 per square foot ($10.76 to $53.80 per sq m) because the system must be designed, and it requires extensive cabling, according to Exact Ventures, a telecom market research firm based in Burlingame, California. For a 500,000-square-foot (46,000 sq m) office building, then, DAS could cost from $500,000 to $2.5 million.

Meanwhile, small cells, as the name implies, are smaller in every way. A typical picocell is about the size of a small printer, and its signal covers only about 650 square feet (60 sq m) of space. Also, each small cell transmits a single frequency, meaning it connects with just one carrier. But the system is easy to install, taking just a few days, and its primary appeal is its low cost. Installation can range from $0.25 to $0.50 per square foot ($2.69 to $5.38 per sq m), and once equipment is factored in, the cost of outfitting a 100,000-square-foot (9,300 sq m) facility would range from about $35,000 to $65,000, according to industry experts.

In commercial real estate, investments in DAS and small-cell systems are made in three ways: operator-driven installations, property owner financing, and third-party integration.

The operator model involves one carrier, such as AT&T or Sprint, taking on the installation, management, and integration with other cell networks. This makes financial sense for the phone companies mostly in indirect ways—reflecting what the companies can save rather than what they can gain. Better reception, for instance, could lead to fewer customers switching to other carriers. Also, DAS and small cells free up capacity on carriers’ cell towers, thus reducing the need to build more towers.

Throughout the stadium, the system relies on some 250 antennas mostly hidden from view, such as the boxes in the second-to-the-bottom slab under the stands. (Boingo Wireless)

“The return on investment is long-term,” says Bryce Bregen, vice president of sales and marketing for Duluth, Georgia–based Connectivity Wireless, which develops DAS systems as a third-party vendor. “It doesn’t make a lot of sense financially, but they’re trying to prevent churn.”

If phone companies won’t make needed telecom improvements, building owners may decide to make the investment themselves. This can make financial sense for the real estate owner or developer if better signal reception quality and internet connectivity provide a competitive advantage in the marketplace, resulting in lower tenant turnover. In some cases, though, the investment is merely the cost of staying competitive.

That is how the Athens Group, a Phoenix-based development company, justified incorporating DAS in the development of its two newest luxury hotels—the 174-room Montage Deer Valley in Park City, Utah, and the 201-room Montage Beverly Hills in Beverly Hills, California. “The hotel operator does not want to jeopardize losing these customers who pay very high rates to stay at ultra-luxury properties,” says Jeff Mongan, a senior vice president at Athens and a vice chairman of ULI’s Recreational Development Council (Red Flight).

Finally, a number of companies like Connectivity Wireless, Boingo Wireless, and Public Wireless have emerged in recent years as third-party vendors, acting as telecom consultants that find a prospective property and fund the system themselves. This produces revenue for two participants—for the consultant through a lease with the phone companies to hook into the system, and for the property owner through a lease of space for the system’s equipment. For the property owner, the arrangement isn’t a large revenue generator—upwards of tens of thousands of dollars a year, according to industry experts—but it is an additional amenity without an upfront cost.

In New York City, cellphone reception tends to drop off above 20 stories, so the Empire State Building is adding DAS at no cost through the third-party approach. A third-party provider is making the investment and signing up carriers in lease arrangements, then sharing part of the revenues with the building. “It’s a great model,” says Tom Durels, executive vice president in charge of property operations and leasing for the Empire State Realty Trust.

Real estate professionals who have worked with DAS and small cells offer one important lesson from their experiences: investigate and address cell reception on the front end of any new construction or redevelopment process, rather than discover there are issues once the project is completed. “You may not be thinking about it now, but you should be, or it’ll be a $100,000 solution later,” says Haughey. ul

Jeffrey Spivak, a senior market analyst in suburban Kansas City, Missouri, has been writing about real estate, development, and infrastructure issues for more than 20 years.

For the architecture business in the United States, the Great Recession was, in the moderate word used by the American Institute of Architects (AIA), “destructive.” Revenues at architecture firms plunged more than 40 percent from 2008 to 2011, and 28 percent of all architecture jobs disappeared during roughly the same period, according to AIA figures. Through all this, though, one segment of the building design and planning profession managed to grow and become more influential: urban design centers.

Design centers are small agencies or groups—typically with the word design in their name—that focus on downtown aesthetics and the walkability of public and some private spaces, one project at a time. No two design agencies are the same, but their work can include reviewing building plans, enforcing design guidelines, proposing streetscapes and parks, promoting redevelopment opportunities, and sometimes working for private developers. Basically, urban design centers act as a cross between a city codes department and a civic booster organization. Think of them as gatekeepers of the urban built environment.

“There’s an equation that good design equals good economic development, that well-designed projects create a sense of place,” says Mark Brodeur, executive manager of the City Design Center in San Antonio. “So I like to say that we bring added value to the urban environment. We’re not going to redesign cities or change cities, but we incrementally bring added value to projects that come forward.”

The Association of Community Design, a nonprofit umbrella network of architectural design centers, reports that design agencies exist in more than 35 major U.S. metropolitan areas. Several have been around since the 1990s or before, but many have formed since the turn of the century. Nearly a dozen centers have been launched just since 2007, including those in big cities like Dallas and Los Angeles; midtier cities like Columbus, Ohio, and Memphis, Tennessee; and even suburbs like Arlington, Texas, outside Dallas.

They generally have budgets of a few hundred thousand dollars and are structured in one of three ways:

Some are part of a city government, typically as a unit of a planning department involved in zoning policies and building standards. San Francisco’s City Design Group, for example, developed the city’s Better Streets Plan for streetscapes surrounding new developments, and the Urban Design Studio in Los Angeles created a walkability checklist for building projects.

Some centers are affiliated with a university’s architecture school, so they use staffs of students to work on community design needs.For example, the Kansas City Design Center in Missouri—affiliated with the University of Kansas and Kansas State University—created a new vision for an underused downtown park, which the city government decided to fund. In Ohio, the Cleveland Urban Design Collaborative (CUDC), affiliated with Kent State University, stages temporary events in vacant downtown buildings to attract investment interest.

Some design groups are independent nonprofits that are self-funded and agents of change, offering ideas and guidance to public officials. In Dallas, the CityDesign Studio created architectural guidelines that the city council adopted for a neighborhood near downtown; in Tennessee, the Memphis Regional Design Center offers courses to civic leaders on the importance of a well-designed public realm.

What is driving the emergence of these centers, according to planning and design advocates, is the public’s growing interest in place making, especially in urban areas. Downtowns are growing in population again after decades of decline, and their new residents desire and demand cohesive, walkable, and attractive urban environments. And the public realm usually establishes the paradigm and the environment for private investment interest.

As Simon Pastucha, a city planner who directs the Urban Design Studio in Los Angeles, explains, “We’re starting to see better-designed projects, and it’s helping the development community know what the city’s expectations are for design.”

From the Hipp Deck event, CUDC borrowed a parking garage on the former site of the Hippodrome Theater in Cleveland-the largest, most opulent theater between New York City and Chicago until it was demolished in the 1970s to make way for the parking structure. CUDC programmed the parking garage for one night with theatrical uses-opera, movies, music, and snacks. The inflatable structure was created bu Cleveland artist Jimmy Kuehnle. (Matthew Fehrmann)

Advocacy Role

Last summer in Arlington, a grease fire destroyed units at the Spanish Park Apartments, a nearly 50-year-old complex of mostly two-story buildings that resembled older motels. Some city leaders pressured the owner not to simply rebuild the units but to improve the site, and as an incentive they suggested working with a free service, the Arlington Urban Design Center.

The center is a partnership between the city and the architecture school at the University of Texas at Arlington. Its staff of one city planner and graduate-student interns visited the vacant building site, held meetings, and prepared a reuse plan tailored to the residents’ needs for parking and children’s play space. The owner followed the plan, building more than 20 additional parking spaces, a fenced-in mini–soccer court, a sandbox, and benches. The project was completed this past spring.

“It’s now perceived as one big community play area, so it’s like the safe haven for kids,” says Rich Bilanceri, a real estate manager and representative of the owner, Cooper Redevelopment.

In downtown Cleveland, where vacant lots and buildings dot the landscape, the Cleveland Urban Design Collaborative takes an approach of promoting such sites one at a time. A few times a year, the collaborative takes over a vacant or underused building and holds unusual one-day events, called “pop-ups.” One time, movies were shown at a parking garage; another time, a warehouse was turned into a roller rink.

The idea is to draw attention to—even investor interest in—the buildings while creating “happening” events in downtown Cleveland. Later, the roller-rink warehouse was bought and turned into a center for banquets and receptions.

“We think that by putting ideas in the air, it helps the real estate community in Cleveland,” says Terry Schwarz, director of the collaborative, which is part of Kent State University and has a staff of six. “It’s helping people see the potential of this latent real estate.”

In Tennessee, the Nashville Civic Design Center acts much like a separate downtown council. It studied sites for a new downtown convention center, which recently opened. It explored the concept of an elementary school downtown as a way to attract more residents. And it initiated the idea of a pedestrian bridge, now being developed, that spans railroad tracks and connects a new residential neighborhood to the center of downtown.

“We can bring all the different community groups together to be an advocate for the community,” says Julia Landstreet, executive director of Nashville’s design center. “We find the ideas and bring them to town so they turn into economic development opportunities.”

Indeed, though different design centers do different things, a theme shared by all of them is advocacy. They are activists: they encourage, support, and promote better-looking, more livable, and highly desirable places.

Among the “pop-up” events organized by CUDC was the House Inside Out project. Martin Papcin, an artist from Prague, visited Cleveland to turn a house slated for demolition inside out-slicing the walls off the structure and flipping them-dramatizing the emotional upheaval of the foreclosure crisis. When the house was inside out, the CUDC staged an event on site; a few weeks later, the city demolished the house. (David Jurca)

Design Backlash

In most cases, the real estate community is buying in. But sometimes design centers are viewed as taking their advocacy role too far.

In Los Angeles, the Urban Design Studio now provides a design vision for the city, including street standards that call for landscaping and for new buildings to have windows at the ground floor, both intended to promote pedestrian activity. But not all developers want to pay for those amenities.

“I share a concern of some architects that you can’t always legislate good design. There are projects that don’t fit a mold,” says Craig Lawson, a land use consultant in Los Angeles who has worked with the design studio on several projects. “For the most part, the idea of promoting a better pedestrian experience in downtown has made it more attractive for people to live downtown. But with individual projects, some owners have the flexibility and financing to make the improvements, but some don’t, and that can be an issue.”

In Omaha, Nebraska, earlier this year, urban design turned into a political issue.

Omaha is one of the few cities with dual multiple urban design bodies—an urban design section of the city’s planning department and an independent nonprofit called Omaha by Design, which helped craft urban design policies in the city’s master plan and zoning code. But some developers have complained that the design standards are inflexible and that the planning department’s process is needlessly lengthy, causing project delays. This frustration became a hot topic on the campaign trail during the mayoral election last spring, with one candidate declaring, “A lot of jobs are being developed outside of Omaha because they just don’t want to deal with the planning department. We chase them out.”

The newly elected mayor, Jean Stothert, who also was critical of the planning department, has promised to review the impact of the city’s urban design code and has created a task force for reshaping the department. “It’s a convenient target to complain about,” says Jed Moulton, the city’s urban design section manager.

The experience of Seattle is another cautionary tale. There, CityDesign was established as an independent entity, but in 2004 it became part of the city’s planning department—one of the first urban design centers established in a planning department.

CityDesign was visible in the city and provocative, leading plans to create pedestrian connections along the waterfront and to develop a ring of open spaces around downtown. But then its charismatic director left for another city, the mayoral administration changed, and without those political champions, CityDesign was shut down in 2011.

In downtown San Antonio, an area of largely abandoned buildings was redeveloped as the Sunset Station area of restaurants, hotels, and offices. One of the buildings repaired was the storefront which received masonry repairs, new paint, and a new awning, and now houses an engineering company. (San Antonio City Design Center)

Urban design is still practiced in different departments of Seattle’s government, just not facilitated through CityDesign. “It was flashy and autonomous, and maybe it turned out to be too much so,” says Lyle Bicknell, the principal urban designer in Seattle’s planning department. “You’re somewhat dependent on the quality of the director and the political winds of support.”

There are lessons, then, for urban design agencies across the country. Though the public’s interest in and appetite for attractive urban environments continue to grow, with a result being creation of more design centers in more cities, the countervailing trend that involves rising skepticism toward government planning in general means design centers need to be careful in how they pursue and implement their goals.

“Nobody wants to be told what to do,” says Sarah Abel, president of the Association for Community Design. “There are many different roles that community design centers take on, and it’s important that they work from the ground up, not the top down. But they’re a resource that no one else is providing, and they’re taking on some of the most challenging problems that no one else wants to tackle.

“They’re a way to change our cities.”

Jeffrey Spivak, a senior market analyst at a Kansas City, Missouri–based engineering firm, has been writing about real estate, development, and infrastructure issues for more than 20 years.

]]>http://urbanland.uli.org/planning-design/a-new-voice-in-town-urban-design-centers/feed/4Toll Roads: The Route to Redevelopment?http://urbanland.uli.org/infrastructure-transit/toll-roads-the-route-to-redevelopment/
http://urbanland.uli.org/infrastructure-transit/toll-roads-the-route-to-redevelopment/#commentsTue, 29 Oct 2013 19:10:35 +0000http://urbanland.uli.org/?p=23378Tolls pave the way for road construction when other financing is unavailable. But toll roads will not drive development in an otherwise undesirable market.

In Orange County, California, real estate development firm Parker Properties piggybacked off the creation of the San Joaquin Hills toll road in the 1990s as an opportunity to create the Summit mixed-use business park. The Summit campus now stretches across both sides of the toll road with more than a dozen low- and mid-rise office buildings. (Jim Doyle Photography)

Build a new highway and rooftops will surely follow. In real estate, that has been a bankable truth since the advent of the interstate highway system. But does it also apply to tolled highways? Toll roads are becoming an increasingly popular way to serve transportation needs in fast-growing U.S. metropolitan areas, but the extra expense to use such roadways can deter the very drivers who developers hope to lure to subdivisions, shopping centers, and office parks.

It turns out that actual development trends along newer toll roads in the United States are decidedly mixed. In metropolitan areas where toll roads have been built in high-growth corridors—and where they constitute the only highways built recently—the tollways have been a magnet for real estate investment. But in metropolitan areas where toll roads have been built in low-growth corridors and in competition with free highways, the tollways have usually struggled to attract interest from developers.

These contrasting experiences are playing out across the country. Dallas cannot build new toll roads fast enough, and they have not hurt its booming growth. In North Carolina, a new tollway is credited with reviving development outside Raleigh. But for every Dallas and Raleigh, there are outer suburbs in places like Chicago and Washington, D.C., where the views along toll roads remain much the same as they were the day the roads opened.

Sometimes both types of experiences have occurred in the same metro area, such as Austin, Texas. There, developers are investing and building near a new toll road that cuts through the thriving northern suburbs. But when the highway reaches the more wide-open spaces of the southern suburbs, construction activity dwindles.

“If the demand is out there, the toll road will accelerate it,” says John McKinnerney, assistant chairman of ULI’s Industrial & Office Park Development Council (Gold flight) and a partner with Castle Hill Partners, an Austin-based commercial investment firm.

Thirty-three states now allow tolling, but that does not mean toll roads have been created wherever they are allowed. Public toll roads still do not exist in 20 states and are particularly rare in the Upper Midwest, the Mountain West, and the South, according to the National Conference of State Legislatures. Yet, tolling is ballooning in metropolitan areas: from 1998 through 2010, tolled miles =in urbanized areas jumped 36 percent, according to the Federal Highway Administration (FHA).

Overall, annual capital expenditures on toll roads throughout the country have soared more than 20-fold, from $155 million in 2000 to $3.65 billion in 2011, the latest year for which FHA statistics are available. In metro Dallas alone, the North Central Texas Council of Governments unveiled a new 20-year plan that calls for nearly $50 billion of new tollways, highway toll lanes, and other roads, spread across eight counties.

Now even the federal government—which traditionally prohibited federal funding for toll roads—is offering new opportunities. The latest federal transportation bill, MAP-21, passed in 2012, permits the conversion of non-interstate free highways to toll roads and, for the first time, authorizes federal participation in tolling projects.

The Summit’s main parkway passes under the toll road. (Jim Doyle Photography)

Tolling is growing because traditional sources of transportation funding are increasingly under pressure. At the federal level, the Highway Trust Fund—the main source of federal transportation funding for states—is constantly facing insolvency because the federal gasoline tax has not been raised in two decades. At the state level, tax revenues declined when the Great Recession began, forcing years of budget cuts that delayed new transportation projects. In this funding environment, tolling provides a new revenue source, and in many cases it is allowing projects to proceed that otherwise would not have funding.

As investment bank UBS stated in a 2012 report on highway funding: “More tolling for existing roads and new roads seems inevitable as state and local governments search for additional revenue sources to fund transportation projects.”

Still, tolling’s effects on real estate are not well documented or understood.

Surprisingly, given the historical connection between highways and real estate development, few studies have actually investigated the relationship between toll roads and land use. But the studies that have been done have found that toll corridors had higher real estate values. A 2001 study, “New Highways, House Prices and Urban Development,” by professors at the University of California at Irvine, found homebuyers were willing to pay a premium for closer access to two Orange County, California, toll roads. Likewise, a 2007 study, “Toll Roads and Economic Development: Exploring Effects on Property Values” by Sharada Vadali at the Texas Transportation Institute at Texas A&M University, found that prices for homes within one mile (1.6 km) of suburban Dallas toll roads climbed faster than those in other areas.

“Toll roads do work. That’s why people like them,” says Denise Casalino, a senior vice president for transportation consulting firm AECOM and a member of a ULI panel convened last year to begin exploring toll roads and land use. “They are generally faster, and they are generally less crowded. They do what they’re supposed to do.”

Interestingly, because of where toll roads have and have not accelerated development, a case can be made that tollways are more likely to promote compact development than sprawl because the tolls add to the expense of long commutes. Indeed, in the case of Austin’s Whisper Valley—a mixed-use community with 7,500 planned housing units and the largest project now under construction along a stretch of State Highway 130 toll road completed in 2007—the site was chosen because of its proximity to the airport, which is also along the toll road, as well as the short commute to downtown using a different, nontoll highway.

“That was a very fundamental reason why we felt a desire to buy this land,” says Douglas Gilliland, president of Taurus of Texas, Whisper Valley’s development firm.

“Given the state of transportation funding in this country, there will be a lot of different tools on the table, and value capture may be one of the solutions.” – Kristi Lafleur

Growth Corridors

In the right places, toll roads have proved to be catalysts that drive additional growth and development. In the 1990s, when the San Joaquin Hills toll road was completed in Orange County, California, Parker Properties developed an office park nearby, with the company’s then-CEO telling the Los Angeles Times, “Without the tollway, that would never happen.” Elsewhere, parcel delivery service UPS a decade ago chose a site for a distribution center just south of the Indiana Toll Road in South Bend because of the east–west access. “If it weren’t there, we probably wouldn’t be there,” a company spokesperson told the Indiana Economic Digest.

Indeed, in an anecdotal examination of development clusters along selected toll roads, one common element is exclusivity: the toll road is the only kind of highway being built and available for development, or it is the main access to or through a metro area’s primary growth corridor.

Nowhere has this been the case more than in metro Dallas, where three toll roads—the Dallas North Tollway, the President George Bush Turnpike, and the Sam Rayburn Tollway—fan out across the northern suburbs, the metro area’s primary direction of growth. One 2006 study conducted for the North Texas Tollway Authority determined that more than $28 billion in new development, measured by appraised property values, had occurred within one mile of the north–south Dallas North Tollway and the newer east–west Bush Turnpike. The authors, from the University of North Texas, concluded, “Absent these thoroughfares, the northward expansion of the Dallas area would still have occurred—but certainly at a much slower pace.”

The large, booming suburb of Plano is the quintessential example of this. It is bordered on three sides by the three toll roads, and commercial development—from offices to light-industrial space—has gravitated to all three. For instance, Ross Perot started the Legacy master-planned community before the Dallas North Tollway reached Plano, but with that access and the adjacent Sam Rayburn Tollway, Legacy has mushroomed to become a place where 50,000 people live and work in apartments, office parks, and shopping malls.

So when development locales in Dallas are considered, “the choice isn’t a free road or a toll road. It’s a toll road or nothing,” says Michael Dardick, a vice chair of ULI’s Industrial & Office Park Development Council (Gold flight) and president of Dallas-based office developer Granite Properties.

Elsewhere, toll roads have been credited with accelerating growth in a metro area’s primary growth corridor.

In Austin, the direction of growth has primarily been toward the rolling hills north and northwest of downtown. Interstate 35 goes straight north out of the city and bisects the suburb of Round Rock, where the Dell computer company established its headquarters, bringing with it thousands of jobs. Next to Round Rock is Pflugerville, a bedroom community that doubled in population between 2000 and 2006, when the area’s first toll road, which runs right through the town, opened, setting off a wave of commercial construction. A Walmart and a movie theater opened; a shopping center with a Home Depot and a Target was developed at a toll road exit. As a result, the city’s sales tax revenues have jumped 10 percent every year since 2007, says Floyd Akers, executive director of the Pflugerville Community Development Corporation. “It’s almost entirely due to the tollway,” he says. “The tollway is where all the growth in Pflugerville is occurring. It’s been a gift.”

Holly Springs, North Carolina, is a beneficiary of that state’s first toll road, the Triangle Expressway, which ends at the town and connects the N.C. 55 Bypass freeway with Research Triangle Park. This connection has spurred new residential and commercial redevelopment in Holly Springs, including the Holly Springs Towne Center shopping center, which opened this year with several big-box stores. (Kite Realty)

Likewise, in the Raleigh-Durham Research Triangle region of North Carolina, the state’s first toll road, the Triangle Expressway, opened in 2011, stretching to Raleigh’s southwest suburb of Holly Springs. Officials there credit the toll road with reviving development interest coming out of the recession: the town’s building permit numbers rose 47 percent in 2011 and then again in 2012, nearly returning to 2007 housing construction levels.

Every new highway—free or tolled—is built with dreams of economic development. In Oklahoma last year, at the ceremonial opening of a new interchange off the Creek Turnpike in the popular Tulsa suburb of Broken Arrow, Mayor Mike Lester gushed about shopping center plans already announced for a location off the turnpike exit: “I would say in three years you will not recognize that part of south Broken Arrow.”

But highway development dreams do not always come true. Tolled roadways do not always meet traffic forecasts. Financial firm Standard & Poor’s in a series of studies from 2002 to 2005 examined several years of forecasts for new toll roads and found that initial traffic volumes averaged about 25 percent less than forecast. From coast to coast, projects ranging from the Pocahontas Parkway in Richmond, Virginia, to San Diego’s South Bay Expressway have either gone into foreclosure or were sold because of lower-than-expected toll revenues—Pocahontas Parkway being sold in 2006 and South Bay’s owner filing for bankruptcy in 2010 and foreclosure actions being filed in court. Both toll roads are still operating.

Sometimes toll roads are built in locations where developers have little interest—in some cases, because property along toll-free alternative routes is not far away.

Consider Cleveland. Yaromir Steiner, chief executive officer of Steiner + Associates, has been developing and investing in shopping malls and town centers in Ohio for two decades. One main highway through metro Cleveland is the tolled Ohio Turnpike, but Steiner says that when he speaks to department store clients about locations, they do not want a site along a toll road. “If they have only one store to build and can choose between a tolled or non-tolled access road, they’re going to choose the no-toll. It’s more desirable,” he says.

In other cases, developers are not interested because the toll road is too far out on the edge of the metro area.

Outside Washington, D.C., Virginia’s 14-mile (22.5 km) Dulles Greenway is approaching two decades of operations, but it has experienced declining traffic counts for years as some drivers avoid its high tolls—$5.90 for a 14-mile (22.5 km), one-way trip during rush hour—and housing development has slowed in the outlying suburbs northwest of Reston. “If there was a site along the Greenway that was available, would I want to buy it? No,” says Henry Fonvielle, president of the Rappaport Companies, a suburban Washington retail developer. “We’re looking more for existing rooftops and densities than betting on the come. There hasn’t even been demand for pod sites for gas stations, theme restaurants, and the like there.”

Outside Austin, the final leg of State Highway 130 opened last year, and while its northern section fueled development interest—as in Pflugerville—the newest 41-mile (66 km) section south of Austin has been an entirely different story. Drive that southern section today, and most of it is flanked by undeveloped land.

In summer 2012, the town of Lockhart was so excited about the southern section’s impending opening that it held an economic development summit, which organizers dubbed the “Race to Lockhart.” County leader Tom Bonn told the gathering, “We can only imagine what fruits it will bear for Caldwell County. We are ready for industry. We are ready for development. We are ready for jobs.”

Developers have come, they have gobbled up thousands of acres along S.H. 130’s southern section, and their ambitious plans are seen on their websites, but not much dirt has been turned yet. Unlike the northern segment, the southern section is mostly rural. It made a national splash because of its 85-mile-per-hour (137 kmph) speed limit, but it drew only about half the forecast vehicles in its initial months of operation, according to state records obtained by the San Antonio Express-News.

“You’re not seeing a whole lot yet,” says McKinnerney. “Maybe it’ll show up. Growth wasn’t going to go out there. Now that there’s a toll road, will it come? Maybe, maybe not.”

Some communities are finding it takes more than the promise of better access to lure developers and tenants to locales along toll roads. Sometimes it takes incentives, too—not just to create investment interest, but also to overcome the additional driving costs.

Pflugerville was just another sleepy bedroom community 12 miles (19 km) outside Austin, Texas, until the State Highway 130 toll road was built through town beginning in the mid-2000s. The wave of commercial construction triggered by the road includes the Stone Hill Town Center, a shopping center with a Super Target, a Home Depot, and a movie theater. The center is located at the intersection of SH 130, the toll road, and a free highway, State Highway 45. ( New Quest Properties)

On S.H. 130, Pflugerville has lured office tenants with six-figure packages designed to cover their employees’ toll costs during their first year or two of operations. In Orange County, Shea Properties found it had to reduce some office rents to offset driving costs on the San Joaquin Hills toll road, according to Bob Burke, who was with Shea and now is a principal at Greenheart Land in northern California. And some 40 miles (64 km) from downtown Chicago, the suburb of Aurora enticed an outlet mall to the sparsely developed Interstate 88 toll road with an incentive package worth almost one-quarter of the project’s cost.

“You’ll see some development at some interchanges along the outer toll roads in Chicago, and that’s because of incentives offered by municipalities,” says Chrissy Mancini Nichols, transportation director for Chicagoland’s Metropolitan Planning Council. “It has resulted in an uneven pattern of development.”

Value Capture

In some states, toll road planning is running into the same hurdle that free highways have been facing—how to afford the projects. In Ohio and Illinois during the past year, studies of proposed toll roads determined that tolls alone would only pay for half the projects. In Ohio, the Department of Transportation responded by placing its proposed road on the back burner. In Illinois, though, the Illinois Tollway is considering a novel financing option to help close the funding gap for its proposed Route 53/120 in suburban Chicago—an option called value capture.

Value capture attempts to use the expected growth in land values generated by transportation investments. Value capture mechanisms include tax increment financing (TIF), in which taxes derived from new development are used to pay off improvements within the TIF district; special assessment districts, which levy an additional tax on property owners adjacent to the transportation investment; and development impact fees, which are one-time charges to develop land adjacent to an infrastructure investment.

“When the Road Price is Right: Land Use, Tolls, and Congestion Pricing” presents the results of workshops and interviews conducted with more than 35 land use and transportation experts who were asked how tolling and congestion pricing will interact with land use.

The use of TIFs around highways is nothing new, but they generally pay for utility lines or access roads. However, as a financing tool to help pay off a major transportation investment, value capture through TIFs and other tools is still in its infancy. It has been mostly associated with transit projects. Washington, D.C.’s Metrorail expansion to Dulles International Airport, for instance, included a special assessment district that is authorized to raise up to $730 million of the total $5.2 billion cost from commercial landowners with land near the rail line. (The primary source of funding is tolls charged on the Dulles Toll Road, which links the airport with the Capital Beltway.)

Now, some momentum is building to apply value capture as a financing tool for toll roads.

A 2011 study, “Leveraging Land Development Returns to Finance Transportation Infrastructure Improvements” by the Texas Transportation Institute, determined that just during four years, growth in appraised property values along tollways in three counties in that state was enough to support almost $2 billion in bonds to finance toll road construction. The study concluded that “these land development returns establish a new source of funding for these types of projects.”

In Illinois, an advisory council for the proposed Route 53/120 toll road recommended including TIF and a special assessment in the menu of financing options. Its report estimated those fees could cover 10 percent or more of the project’s $2 billion–plus cost. Yet, some communities along the proposed road have balked at the value-capture option because they believe the assessment fees may scare off prospective developers.

“Value capture seems to have some promise, and it’s being explored,” says Kristi Lafleur, executive director of the Illinois Tollway. “Given the state of transportation funding in this country, there will be a lot of different tools on the table, and value capture may be one of the solutions.”

Overall, the future of highway building in America is increasingly moving toward tolling, so the real estate industry needs a better understanding of how and where investments near toll roads can be successful.

Jeffrey Spivak, a senior market analyst at a Kansas City, Missouri–based engineering firm, has been writing about real estate, development, and infrastructure issues for more than 20 years. His firm has played no role in any of the projects named in this article.

]]>http://urbanland.uli.org/infrastructure-transit/toll-roads-the-route-to-redevelopment/feed/3All Aboard: Rail-Centric Construction Gets Back on Trackhttp://urbanland.uli.org/infrastructure-transit/all-aboard-rail-centric-construction-gets-back-on-track/
http://urbanland.uli.org/infrastructure-transit/all-aboard-rail-centric-construction-gets-back-on-track/#commentsMon, 15 Jul 2013 14:43:00 +0000http://urbanland.uli.org/news/all-aboard-rail-centric-construction-gets-back-on-track/With train travel regaining ­popularity and high-speed passenger rail projects or improvements under construction in California, Michigan, and the Northeast Corridor, another era of railroad station construction is dawning. Nearly every station project includes intercity train service, and rail hubs once again are seen as magnets for real estate activity and opportunity.

A historic train control tower would be relocated and rebuilt as a restaurant in the Burnham Place development at Union Station in Washington, D.C.

In the last decades of the 20th century, many of the projects undertaken during the golden era of railroad station restorations across the country involved anything except trains. Union Station in St. Louis, for example, reopened as an urban mall. Stations in Dallas and Jacksonville, Florida, became parts of convention centers. Union Station in Indiana­polis was packed with bars and nightclubs. The Cincinnati and Kansas City stations had museums created inside them.

The Train Shed planned for Burnham Place at Union Station in Washington, D.C.

“What we’re seeing now is a real resurrection of train transportation in the United States,” says Rod Diridon Sr., executive director of the Mineta Transportation Institute, a public policy research center in San Jose, California. “We’re going to see a wholesale return of integrated rail transportation and the return of the station as the iconic focal point in downtowns.”

At Amtrak, the national intercity rail service, the station planning department has become so busy that it now monitors active railroad station plans and projects across the country. Its list is up to 150 facilities, according to John Bender, a program manager for Amtrak station planning. He says this activity level reflects surging passenger travel—from 21 million passengers in fiscal year 2000 to 31 million in fiscal 2012—necessitating new and larger stations to alleviate overcrowding in Amtrak shelters so tiny and dingy that some have come to be disparaged as “Amshacks.”

“Ten or 15 years ago, it was rare for a community to propose a new Amtrak station, but in the past few years, it has just ballooned,” Bender says. “It’s not just a big-city phenomenon; it’s also something that smaller towns are doing.” (Amtrak stations are typically developed by a city or state government, as Amtrak owns only about 13 percent of the stations its trains use.)

Uptown Circle anchors the Uptown Station Development in Normal, Illinois. The traffic circle evolved into a civic gathering place with green features that benefit the community, leading to the roundabout being named a winner of the National Award for Smart Growth Achievement by the U.S. Environmental Protection Agency in 2011.

“Indeed, cities and towns have taken a variety of approaches to railroad station projects. Several different types of plans are completed or underway:

Renovations of older stations that have been vacant or underused. This is occurring in Springfield, Massachusetts; St. Paul, Minnesota; Wichita, Kansas; and Denver. The St. Paul station opened in December; Denver’s is under construction; engineering work has started on Springfield’s; and a developer has announced plans to redevelop Wichita’s. (See “Linchpin of the West,” Urban Land, July/August 2012, for an overview of the Union Station project in Denver.)

Construction of entirely new stations. This is popular in small and medium-sized cities, such as Birmingham, Alabama; Normal, Illinois; Raleigh, North Carolina; Roanoke, Virginia; and Rochester, New York. The station in Normal opened last year; the projects in Birmingham, Raleigh, and Rochester are in the design stage; and the project in Roanoke is on the drawing board and not yet funded.

Modernization and expansion in and around larger stations. This is happening in Washington, D.C.; New York City; Chicago; Baltimore; and Sacramento, California. All these involve real estate development: a historic building is being renovated in New York; master plans have been unveiled in Washington, Chicago, and Baltimore; and Sacramento officials are still studying options.

Long-range planning for high-speed rail. Communities across California, along with big cities ranging from Miami to Philadelphia, intend to accommodate future bullet trains in multimodal or stand-alone stations. In California, multimodal stations are under construction in San Francisco and Anaheim, and sites have been selected in Los Angeles and Fresno; new projects are under discussion in Miami and Philadelphia.

Uptown Station in Normal, Illinois. Rail tracks and platform are to the left of the building.

One commonality among all these different station projects and plans is a downtown location, so municipal officials hope the new or renovated stations serve as catalysts for additional downtown redevelopment. It is already happening in some cities. The new station in Normal has attracted new hotels close by. Denver’s renovation is already luring new apartments to the neighborhood. And last year, when an executive announced the relocation of his high-tech firm to Raleigh, he cited the proposed rail station as one of the site’s attractions.

Thus, improved train stations are another magnet—like libraries and arts centers—that cities are pursuing to help revive their downtowns.

“What local governments increasingly understand is station redevelopment as an economic development tool,” says John Robert Smith, a former mayor of Meridian, Mississippi, who now is president of Reconnecting America, a Washington, D.C.–based nonprofit organization that promotes transit-oriented development.

Renovations

Almost all of America’s iconic Union Stations—so called because they were built as joint ventures, or “unions,” of several independent railroads—were revitalized in the 1980s and 1990s. After that, interest in railroad station restoration waned, as local governments turned their attention to commuter-rail facilities and federal incentives for station restorations waned. During the 2000s, websites like Railway Preservation News went dark, and organizations like the Great American Station Foundation stopped producing revitalization manuals and economic impact reports.

This decade, however, federal government grants for activities ranging from historic preservation to air quality mitigation began promoting railroad projects again, leading to a new wave of station projects focused on transportation uses.

A rendering of Alta City House, a luxury apartment building under construction a block from Denver’s Union Station.

With funding finalized last year, Springfield’s long-vacant Union Station has launched a $78 million reconstruction to accommodate Amtrak along with metro and intercity buses and future commuter rail, with an estimated completion date of 2015. Although construction on Denver’s Union Station started in 2011, it closed last fall in order to undergo a $484 million transformation into the region’s central transportation showcase, with Amtrak, commuter rail, light rail, buses, and even shuttle services that together are expected to handle 200,000 passengers a day upon completion in mid-2014. St. Paul’s 89-year-old Union Depot, with its neoclassical front columns, reopened in December after a $243 million restoration to handle Amtrak trains, metro and intercity buses, a possible bicycle shop, plus a future light-rail connection right outside the front door. Previously, Union Depot had not been handling Amtrak trains; there was a separate small Amtrak station elsewhere.

“There’s been a change from the ’80s and ’90s when cities were bringing back old stations. There wasn’t an interest then in bringing back trains,” says Jim McDonough, a county commissioner in St. Paul who chairs the Ramsey County Regional Railroad Authority. “Now, we have a half-dozen transit systems planned for our depot, some well into the future. We’ve come a long way from the ’80s in the way we view transit and intermodal connections.”

The three restorations would not be possible without federal support. Federal transportation grants and loans are slated to cover 40 percent of Springfield’s project costs, 51 percent of St. Paul’s, and 84 percent of Denver’s. “This is as good a use for taxpayers’ dollars that you’ll ever find in America,” U.S. Transportation Secretary Ray LaHood said at the announcement of Springfield’s grant last July.

With the renovated stations becoming central intermodal hubs, the new activity is expected to help strengthen and transform the surrounding downtown neighborhoods.

In St. Paul, during the depot’s restoration, the city commissioned and adopted a master plan for the station’s Lowertown neighborhood, a sleepy warehouse district inhabited by artists on the edge of downtown. Not many vacant developable lots remain in the district, but several happen to be clustered around the depot and are used as surface parking lots. The plan foresees those lots eventually being used for multistory housing—both apartments and condominiums. Already, a sign on one lot announced that 85 apartments were coming.

“Lowertown is already like a perfectly formed transit-oriented village. It’s a pretty dense place, and it will become more so in the coming years,” says Andrew Dresdner, an urban design associate with the Cuningham Group, part of the consulting team that prepared the Lowertown plan.

In Wichita, an office/retail developer bought the vacant Union Station earlier this year and hopes to make it a part of the city’s entertainment district across the street. In Denver, Union Station sits just a few blocks from Coors Field, Larimer Square, and other parts of the resurgent Lower Downtown (LoDo) district. Since the station’s redevelopment was finalized, a five-story office building and seven new housing development projects totaling more than 1,300 units have been announced or started in the Central Platte Valley area adjacent to the station.

“It’s the hottest place in downtown now because the riverfront and LoDo are built out,” says Tim McEntee, Rocky Mountain region director of Wood Partners, one of the nation’s largest multifamily developers and one of the partners in Alta City House luxury apartments, now under construction just a block from Union Station. “One of our main philosophies is to build green, so pursuing sustainability and alternative transportation is something we’re constantly looking for in our locations.”

New Construction

For cities without a majestic or historic Union Station, the desire or need for better rail accommodations has led to a surge of new construction projects or plans.

In Raleigh, train ridership just from 2008 to 2011 jumped more than 80 percent to nearly 200,000 passengers annually, making it the second-busiest Amtrak station in the Southeast. (Richmond, Virginia, has the busiest Amtrak station in the Southeast.) But that existing station, which was built in 1950, is about the size of a single-family house—2,500 square feet (230 sq m)—and it looks like one, too, complete with a gable over the front door. On some days, passengers spill out of the waiting rooms and have to stand outside. “We had to get out of the box of the current station,” says Craig Newton, a rail facilities engineer for the North Carolina Department of Transportation, which co­ordinates rail improvements in the state.

So the state and city governments are moving ahead with a $60 million plan to reuse a vacant downtown industrial building 12 times the size of the existing station and create what has been dubbed “the Gateway to the South” as a major stop on a proposed future high-speed rail route between Washington, D.C., and Atlanta.

Raleigh joins more than a half-dozen other medium-sized cities that are planning new, larger train stations. Rochester, New York, where train ridership also has nearly doubled since 2007, is expected to start construction this spring on a new downtown station. So is Birmingham, Alabama, where the glass-fronted facility will serve as an intermodal hub. Roanoke, Virginia, which does not have Amtrak service, is clamoring for it and has even begun scouting downtown locations for a station. Meanwhile in Illinois, Normal built a three-story transportation center that opened last summer, and it has already been a stop on an October 2012 test run for a higher-speed, 110-mph (177 km/h) Amtrak train. It was the first test of high-speed rail in Illinois.

As with station renovations, the new facilities are relying heavily on federal assistance: the Federal Railroad Administration and the U.S. Department of Transportation’s Transportation Initiative to Generate Economic Recovery (TIGER) grant program are providing 70 percent of the funding for Rochester and Raleigh, for instance.

Some cities constructing new stations are already seeing economic development benefits. Raleigh has gotten a head start on the city’s projection that the new train station will encourage the construction of more than 2.5 million square feet (232,000 sq m) of office space and 6,000 residential units downtown. Last summer, a division of information technology giant Citrix Systems announced that it would move its headquarters to a refurbished warehouse just one block from the new station, which is expected to be completed in 2017. Citrix’s chief executive explained that one of the location’s attractions was that it lay within walking distance to trains.

Meanwhile, an Illinois newspaper headline last fall crowed about Normal’s new Uptown Station: “Transport hub has Normal buzzing.” That is because the downtown’s renewal, with the station as a centerpiece, has attracted new development costing more than four times the station’s $46 million price tag. The new projects include a Marriott hotel and conference center, a five-story apartment building, and new restaurants. The city also has approved a five-story mixed-use project and a Hyatt hotel, expected to be completed sometime this year.

While local and state government incentives aided Normal’s building boom, Mayor Chris Koos described the new station—the second busiest in Illinois behind Chicago’s—as a development catalyst. “I know it caused others to do projects in the area,” he says. “It’s bringing more people in and through the uptown area, and businesses have told me it’s making a difference to them.”

Long-Range Hopes

Looking ahead over the longer term, other cities have big ambitions for the real estate around their train stations.

In New York City, construction has finally begun on Moynihan Station, a long-delayed $270 million project to transform the historic Farley Post Office Building into the new front lobby for what is left of the old Penn Station beneath Madison Square Garden and across the street from the Farley building. Penn Station is still heavily used for train and transit service.

In Baltimore, Amtrak consultants this spring unveiled a master plan for acreage around that city’s Penn Station that calls for office towers and up to 1.5 million square feet (139,000 sq m) of residential and commercial space. In Washington, D.C., Amtrak last year unveiled a new master plan for that city’s historic Union Station that would triple passenger capacity, with the improvements funded by a 3 million-square-foot (278,000 sq m) mixed-use development that would create a new urban neighborhood atop the station’s railyards. The neighborhood would be called Burnham Place—named for original station architect Daniel H. Burnham.

Burnham Place at Union Station would extend from the historic train station, designed by Daniel H. Burnham, over the existing rail tracks. This would reconnect neighborhoods that have been severed for generations.

And in Sacramento, an architecture firm has been hired by the city to rehab the dilapidated Sacramento Valley Station, which is envisioned as eventually becoming a gateway to one of the nation’s largest urban infill redevelopment sites. Known as the Railyards, the site is 240 mostly bare acres (97 ha) where rail cars were once repaired on the edge of downtown. During the past two years, teams from the ULI Rose Center for Public Leadership have advised Sacramento on the Railyards’ potential, suggesting the city create a multi-building intermodal transportation district as an initial step that could spark private sector investment. That effort received a boost this spring when the city succeeded in retaining its pro basketball team and revived a plan to build a new arena in the budding station district.

“Understanding the Railyards as a new opportunity is a big step and a process, but the city has to do everything it can to position it and make the most of it,” says Gideon Berger, a planner and former senior director at the ULI Rose Center. “We believe a place like the depot district that’s energized by all the people coming and going will attract investment.”

Meanwhile, elsewhere in California, grand development plans are taking shape around new or improved intermodal facilities intended to accommodate high-speed rail trains in the future.

San Francisco’s mammoth $4.2 billion Transbay Transit Center, now under construction (designed by Cesar Pelli), will serve 11 different transit systems and serve as the northern terminus for California’s high-speed rail network. Transbay is the centerpiece of a 145-acre (58 ha) Transit Center District that has already lured the development of the 61-story Transbay Tower, which would become the city’s tallest building upon completion in late 2015. To the south of San Francisco Bay, San Jose has approved a new mixed-use master plan for 240 acres (97 ha) surrounding its Diridon Station that would turn the area into a sports and entertainment center. On the opposite end of the state, Anaheim has similar hopes for the $188 million Anaheim Regional Transportation Intermodal Center (ARTIC), currently being built. It will feature an iconic parabola-shaped roofline.

Elsewhere, a consultant’s report for a proposed privately owned intercity rail line in Florida envisions a new Miami station flanked by mid-rise hotel/office/residential towers. And Amtrak’s high-speed rail plans for the Northeast Corridor have spurred talk in Philadelphia about the possibility of a new train station that could revitalize a section of downtown.

What is different about all these station concepts today, compared with renovation projects decades ago, is that, once again, they embrace trains. They also integrate additional development opportunities, ultimately resurrecting the role of train stations as civic linchpins.

“If they’re built in isolation, then they’re not going to have any level of success,” says Scott Bogren, communications director with the Washington, D.C.–based Community Transportation Association of America, which promotes rail transportation. “It’s no longer enough to ‘build it and they will come.’ It’s build it—plus build everything around it and connect to it—and then they will come. That’s the new formula today.”

]]>A new generation of green building evaluation mechanisms is gaining popularity in the United States, signaling a new phase in the industry’s engagement with environmental and sustainability issues, one in which simple building certification is no longer enough and the commercial real estate marketplace is increasingly having to negotiate a variety of new building codes, additional ratings systems, and even performance measures.

Moreover, with the federal government, commercial property owners, and tenants increasingly interested in a building’s ongoing operating performance in addition to its green design attributes, other performance measurement tools are cropping up, such as EPA’s Building Performance with Energy Star program, the Greenprint Performance Index, and even the next generation of LEED, which is currently under development, incorporates a building-performance section.

“A virtual blizzard of green and sustainability metrics has emerged over the past few years,” says Patricia Connolly, director of global sustainability for RREEF Real Estate, the real estate investment management business of Deutsche Bank, and a member of ULI’s Responsible Property Investment Council. “LEED has been the default standard, and it’s a good place to start. We consider a variety of other green programs to apply economic and green best practices on behalf of our clients. There’s been a lack of standards in the industry to communicate sustainability performance, and from an investment manager’s perspective, we need standard metrics to demonstrate both financial performance and operating efficiency for buildings.”

Judi Schweitzer, a sustainability consultant in California and a vice chair of ULI’s Sustainable Development Council, notes that the choice of which standard to use now depends on the building asset type involved, local regulations, and the green goals being pursued.

“Like LEED, all third-party programs have their application and limitations,” Schweitzer says. “If you are working with the Defense Department or building homes, the measuring stick may be different. It is important to ask the right questions. In real estate, the real question is how do you want to account for sustainability’s additional environmental and social benefits? Do you value performance-based results or are you looking for certification recognition, or both? This is an important and meaningful discussion for all of us to have.”

Proliferating Green Metrics

This broad-based real estate industry discussion, though, is taking several twists and turns. Some real estate leaders believe the proliferation of green building standards and measures now requires better coordination and compatibility.

“You have these different organizations with different structures, and from a practical point of view we don’t want to overburden our development teams, so the more these programs are compatible, the better,” says Kenneth Hubbard, executive vice president of Hines, the international real estate development and investment firm, and a ULI trustee. “You want this information to be rational and useful and consistent.”

With so many choices now, the growing legion of green building evaluation mechanisms is leading to some confusion among green developers, owners, and consultants about whether some of the standards overlap and which third-party program to prioritize.

“The USGBC has done an exceptional job of galvanizing the world about sustainable building,” says Colin Cavill, a multifamily developer and senior vice president of investment services for Colliers International in Atlanta, as well as a member of ULI’s Sustainable Development Council. “But there are more competing interests now, so there is a true dilemma about what’s the best program to follow.”

Defense Department Shift

A series of actions by the federal government in recent months has highlighted this dilemma.

Congress in late December inserted a provision in the newest Defense Department funding bill that severely limits the military’s pursuit of LEED’s highest ratings, Gold and Platinum, in new or renovated facilities. This action was prompted, in part, by a long-simmering dispute in the timber industry over LEED’s treatment of domestic wood products. As a result, the Defense Department’s efforts to achieve the highest LEED ratings remain murky, and it could have repercussions for the rest of the real estate industry.

LEED offers design criteria for construction materials, energy-efficient equipment, water conservation, and air quality, among many things. For a dozen years, LEED has been the leading standard for green buildings, with certification becoming the equivalent of a Good Housekeeping Seal of Approval for sustainable real estate. The number of LEED-certified commercial buildings recently surpassed the 12,000 mark, which dwarfs any other rating system.

The federal government was one of LEED’s early supporters. The U.S. General Services Administration (GSA), the nation’s largest civilian landlord, started designing all its new federal buildings to LEED standards, and the Army and Navy later set LEED Gold as the requirement for their new facilities. Today, by one estimate, 25 percent of LEED-certified buildings are built, renovated, and prepared for the federal government, either by direct federal construction or by construction for federal leases by the private sector.

Now the Defense Department’s fiscal year 2012 funding legislation prohibits the military from spending any money to achieve LEED Gold or Platinum certification unless the department produces a cost/benefit analysis with a demonstrated payback or proves that such certification “imposes no additional costs.” Green building advocates immediately assailed the action for adding another obstacle to pursuing energy efficiency. Bryan Howard, USGBC legislative director, called the provision “irrational and misguided at best” on the organization’s blog.

The Defense Department’s response has been evolving this spring. In February, Katherine Hammack, the Army’s assistant secretary of installations, energy, and environment, commented publicly that Army projects pursuing the Silver level were reaching the Gold standard at no additional cost. But the Naval Facilities Engineering Command will no longer “require LEED Gold or allow LEED Gold to be used” unless contractors pursue the certifications at no cost to the Navy, according to spokesman Whitney DeLoach.

Dorothy Robyn, a deputy undersecretary of defense for installations and environment, told congressional committees in March that her office would be issuing a new mandatory construction code “based heavily on ASHRAE 189.1,” along with continuing to pursue at least LEED Silver certification.

ASHRAE’s 189.1 standard was developed in partnership with the USGBC and is structured similarly to LEED, with categories for sustainable sites, energy efficiency, water use, indoor air quality, and materials and resources, such as use of recycled and renewable products. ASHRAE 189.1 and LEED are intended to complement each other.

But they are different. “The codes tell you what to do, and the certification systems measure how well you’ve done,” says Roger Platt, USGBC senior vice president for global policy, who helped found ULI’s Sustainable Development Council.

Kansas City, Missouri–based construction attorney Chris Cheatham, for one, says he is baffled by how the two are supposed to work in tandem. “Requiring both LEED certification and compliance with a green building code may lead to two problems,” says Cheatham, who also writes the Green Building Law Update blog. “First, obtaining both will result in duplicative costs, particularly on the administrative side. Second, requiring both will likely result in conflicting interpretations. A federal contracting officer may interpret a code one way, while a LEED application reviewer may interpret a similar rating system requirement another way.”

Still, the Defense Department’s proposed shift to ASHRAE could be an important development in real estate. If state and local governments and other institutions follow suit, green standards could be required for more new buildings, thus expanding the entire green industry, says Stuart Kaplow, a Baltimore-based real estate attorney and chair of the USGBC’s Maryland chapter.

Kaplow says that because of its stringent provisions, LEED can realistically target only 25 percent of commercial construction starts. “Making 189.1 an alternate path potentially impacts the other 75 percent of construction that wouldn’t use LEED,” he says. “It could be the most sweeping change to green building since LEED itself.”

Congress’s decision to limit LEED occurred for two main reasons, according to industry and political observers. First, LEED got caught in Washington’s belt-tightening: numerous studies over the years—such as one by CoStar Group researchers in 2008 and another by the U.S. Army Corps of Engineers last year—have found that achieving Gold and Platinum certification levels does add to the upfront construction costs of a project.

But the secondary reason was much more surprising: Congress became a battleground in the so-called wood wars.

The Wood Wars

From its beginning, LEED has been aligned with the Forest Stewardship Council (FSC), a Germany-based timber association. The USGBC and environmental groups such as the Sierra Club have long viewed the FSC as the most environmentally conscious forest-management standard. The FSC requires, among other things, strong protections for habitats and ecosystems during the harvesting process in order for lumber, flooring, paneling, and other wood products to receive its certification. The only kind of wood awarded points in the LEED certification process is FSC certified.

Meanwhile, the U.S.-based Sustainable Forestry Initiative (SFI), a group more aligned with timber interests, created its own wood product certification program that also recognizes responsible forestry practices, such as replanting. The SFI’s membership has grown to incorporate nearly 60 million acres (24 million ha) in the United States, almost double the FSC’s roughly 35 million acres (14 million ha). The SFI has used this disparity to its advantage, persuading dozens of governors, members of Congress, and even state foresters to write letters urging LEED to certify and incorporate more U.S.-based wood.

“A lot of politicians care about the wood issue because wood from their own states can’t be counted in the [LEED] credits, and that can hurt their state economies,” says Jason Metnick, SFI senior director for market access.

Then a couple of politically powerful people got involved. U.S. Representative Larry Kissell (D-NC) learned that the U.S. Marine Corps’s Camp Lejeune in his state intended to use imported Asian bamboo for a gymnasium because LEED limited use of domestic wood. He teamed with Senator Roger Wicker (R-MS) to advance the Defense bill’s LEED amendment through the House and Senate.

Still, the USGBC continues to balk at changing its wood policy. LEED’s newest version, which was called LEED 2012 and has been renamed LEED v4, appears to strengthen the FSC’s monopoly in the rating system. Previously, LEED allowed non-FSC wood that was harvested within 500 miles (805 km) of a project; the new version would restrict that area to 50 miles (80 km).

However, the proposed LEED v4—which is still being developed—does provide some accommodation to other woods. Among other things, LEED v4 adds alternative points for conducting an environmental impact study of a product’s life cycle, including planting, harvesting, manufacturing, and distribution. LEED v4 offers points merely for conducting the study itself, no matter the outcome. In fact, there are more points in the LEED system for this study than for using FSC wood, causing the forest council to cry foul. “It seems like a terrible imbalance. It’s not rewarding the right things,” says Corey Brinkema, U.S. president of the FSC.

For the real estate community, wood epitomizes the escalating politicization and polarization of LEED. Some green building advocates see this controversy as a normal give-and-take in LEED’s evolving development process. But others say the controversy is undermining LEED’s image and support.

“More than polemical potshots, many have observed the negative impact the certified wood issue is having on LEED,” says Kaplow.

Additional Standards

Alternatives to LEED have always existed. In fact, the federal government’s creation of the Energy Star energy management standard and the global British Research Establishment Environmental Assessment Method (BREEAM) green building rating both predate LEED’s inception in 2000. But because LEED was developed through a broad-based consensus process, it was quickly respected and accepted. Between 2000 and 2010, 400 U.S. cities, counties, states, and federal agencies across 45 states passed some sort of policy requiring LEED standards for their new or renovated facilities.

In the past two years, however, the number of new government entities adopting LEED policies has fallen to a trickle, according to a list compiled by the USGBC. Instead, a growing collection of alternative programs is gaining momentum.

There are green building codes, such as the two-year-old International Green Construction Code, developed by the International Code Council, a U.S.-based construction industry association, and the 2010 California Green Building Standards Code (CALGreen). There are other voluntary building design rating systems, such as the three-year-old Sustainability Tracking, Assessment, and Rating System (STARS), developed by the Association for the Advancement of Sustainability in Higher Education (AASHE) just for colleges and universities. And there are building operations performance measurements, such as the federal government’s leadership in constructing and encouraging construction of commercial buildings to achieve net-zero energy use off the utility grid.

All this is happening because LEED and Energy Star are no longer enough for a marketplace yearning for more ways to go green and incorporate sustainability. In a report this spring, the GSA compared green rating systems and found Green Globes aligned better with federal requirements for new construction, whereas LEED was most compatible for existing building rehabs. LEED has expanded its leadership role over the years, adding separate certifications for different construction types, from commercial interiors to school facilities. But commercial real estate owners, developers, and tenants now have more choices, and they are seeking additional ways to enhance value and create a competitive advantage.

LEED is here to stay; it is too well established in the marketplace to fade away. Plus, the growth of alternative green codes may turn out to be a good thing for LEED: if more buildings follow green construction standards, then reaching LEED will not be much more of a jump, so more developers may do it. “It makes LEED more cost-effective for those wanting to demonstrate leadership,” says Platt, USGBC senior vice president.

“I’m hearing two things from people in commercial building,” adds Andrew Gowder, Jr., a land use attorney in Charleston, South Carolina, and assistant chairman of ULI’s Sustainable Development Council. “One is, LEED continues to have a very strong brand appeal, and there’s a feeling it’s necessary to some extent to market a building.

“On the other side, others—particularly on the public or institutional side—are looking at the cost of the [LEED] process, and they’re trying to emulate those standards without going through the certification process. . . . So some people may look at more alternatives, but I don’t see a great migration away from LEED.”

]]>http://urbanland.uli.org/industry-sectors/the-maturation-of-the-green-building-industry/feed/0LEED Backlashhttp://urbanland.uli.org/sustainability/leed-backlash/
http://urbanland.uli.org/sustainability/leed-backlash/#commentsWed, 22 Feb 2012 06:00:00 +0000http://urbanland.uli.org/news/leed-backlash/The dominance of LEED—the world’s most popular green building brand—is facing two threats: governments are limiting its application as a policy benchmark and are pursuing other green building standards.

How far this backlash grows could have implications for all of commercial real estate. In fact, the Urban Land Institute’s Sustainable Development Council plans a program on challenges and alternatives to LEED during the ULI Spring Meeting in May.

Recent movements against LEED are taking two main forms, primarily in the public sector: governments limiting its application as a policy benchmark and pursuing green building standards other than LEED.

In terms of green policy, the U.S. Congress passed and President Obama signed a bill in December that severely restricts the U.S. Department of Defense (DoD) from spending extra money on new or renovated facilities to attain LEED’s highest rating levels—Gold and Platinum certification. This was a surprising development considering the federal government has been one of the first and primary champions of LEED since its inception in 2000.

In terms of LEED alternatives, a growing number of state and local governments are adopting different green building standards that aren’t tied to LEED, such as California’s statewide CalGreen building code that took effect last year. In addition, several other rating systems are cropping up and gaining momentum, such as the Green Building Initiative’s Green Globes, which is touted as a simpler and less expensive rating system.

“While this may be painful for the USGBC, it’s great for the green building world because we’re figuring out what tools work and where LEED fits into green policy,” says Chris Cheatham, a green building construction attorney in Kansas City, Missouri, who writes the Green Building Law Update blog.

Judi Schweitzer, a sustainability consultant in California, an advisory member of California’s Building Standards Commission that developed CalGreen, and a vice chair of ULI’s Sustainable Development Council, adds: “I do think there will be repercussions in the commercial building industry. The standard that everyone’s been using has been called into question. If I was managing a project that was planning LEED Gold or Platinum, I’d be thinking twice about it.”

At this point, though, it’s unclear whether the challenges to LEED represent mere hurdles in LEED’s own continued growth, or some larger trend that will ultimately undermine LEED’s image.

“The LEED brand is here to stay,” says Stuart Kaplow, a Baltimore-based real estate attorney who chairs the Maryland chapter of the U.S. Green Building Council. “Those who suggest there will be a significant reduction in market share for LEED are wrong, missing that green building is so fast-growing that such [reduction] would be akin to… commanding the tides of the sea to go back.”

For sure, LEED remains the standard bearer when it comes to green building recognition and performance. The number of LEED-certified U.S. commercial buildings—based on design criteria for energy efficiency, water conservation, and air quality, among other things—has surpassed the 10,000 mark, which dwarfs the number of commercial buildings certified under any other rating system. And the cumulative square footage of LEED-certified commercial space nearly tripled between 2008 and 2011 alone, according to the GreenBiz Group research firm.

Still, a national debate about LEED could be on the horizon.

The DoD’s new reauthorization bill only allows pursuit of LEED Gold or Platinum green construction if the Secretary of Defense requests a waiver for a project because LEED certification imposes no additional costs. The bill still allows for defense facility construction to attain the LEED Silver designation—which already is a DoD-wide goal—but some federal agencies such as the Navy have mandated building to the Gold standard.

It appears that Congress’s action primarily stemmed from a dispute over the use of wood in green construction. A coalition of green building advocates, timber interests, and dozens of congressional members have objected to what they believe is an exclusion of domestic sources of wood in the LEED point system. Defense construction should follow “credible standards that more accurately assess U.S. wood products,” Senator Roger Wicker, a Mississippi Republican, told the Federal Times.

Bryan Howard, the USGBC’s legislative director, called the Defense bill provision “irrational and misguided at best” on the Council’s blog. But it could mark just the beginning of Congress’s scrutiny of green building standards. The bill also requires the DoD to prepare by the end of June a cost-benefit and return-on-investment analysis of the military’s energy efficiency building standards.

Meanwhile, because LEED certification can add thousands of dollars to a building’s cost, alternative programs are emerging that attempt to cover green buildings more broadly or fill in LEED’s gaps.

There are different rating systems such as Green Globes and Build It Green’s GreenPoint aimed at smaller businesses and homes. Plus, there are new niche rating systems, such as the Living Building Challenge geared toward zero-utility-energy buildings and the American Architectural Manufacturers Association’s development of a green certification for windows and doors.

In addition, some governments are adopting building codes that apply green standards outside of the LEED blueprint. CalGreen represented the first statewide green building code, and it eschews outside (third-party) evaluations like LEED’s. And in March, Maryland will become the first state to fully adopt the International Green Construction Code as a local baseline option for new construction.

Overall, then, LEED remains the dominant force in green building standards, but it increasingly faces challenges and competition.

“I’m hearing two things from people in commercial building,” says Andrew Gowder, Jr., a land use attorney in Charleston, South Carolina, and assistant chairman of ULI’s Sustainable Development Council. “One is, LEED continues to have a very strong brand appeal, and there’s a feeling it’s necessary to some extent to market a building.

“On the other side, others—particularly on the public or institutional side—are looking at the cost of the [LEED] process, and they’re trying to emulate those standards without going through the certification process. . . . So some people may look at more alternatives, but I don’t see a great migration away from LEED.”

]]>Residential master-planned communities have traditionally performed better than general subdivisions in terms of sales volume and value appreciation. That trend may have accelerated during last year’s turbulent market conditions as some top-selling communities repositioned their product choices and marketing strategies to succeed in the worst year for new-home sales in a half century.

The U.S. Department of Commerce reported that total 2010 new-home sales across the country sank to their lowest level—323,000—since at least 1963, as the popular first-time homebuyer tax credit expired for good. Yet 2010 sales at top-selling master-planned communities turned around and climbed above 2008 and 2009 levels, according to annual surveys compiled by RCLCO, a real estate consulting firm based in the Washington, D.C., metropolitan area.

Among the master-planned communities that saw increased new-home sales in 2010 were the Woodlands and Sienna Plantation in the Houston metropolitan area; Mountain’s Edge in Las Vegas; and the Villages of Irvine (the Irvine Ranch) outside Los Angeles. In the Houston and Las Vegas metro areas, sales in master-planned communities have grown from 15 percent of the new-home market before the economic recession to 25 percent today, according to developers in those markets.

“It’s very challenging to sell homes anywhere today, but master-planned communities are definitely selling better than non-master-planned subdivisions,” says Mollie Carmichael, a principal with John Burns Real Estate Consulting, based in Los Angeles, and a member of ULI’s Community Development Council (Silver Flight). “They’re more popular because they’re giving the consumer more lifestyle for the price today.”

Indeed, master-planned communities are large-scale developments often encompassing thousands of acres and tens of thousands of residents. They offer a variety of housing choices and the amenities of a small city, such as commercial strips, office developments, schools, parks, and even community events, all controlled by a master developer. The communities are self-contained and well-maintained villages with a branded image, which helps hold value and attract buyers.

In fact, market research conducted by the John Burns firm has determined that residences in master-planned communities command a 5 to 10 percent price premium over comparable homes outside such communities, and another recent RCLCO study in California, Florida, and Texas found the pace of home sales was 50 percent higher in communities with multiple amenities than in subdivisions that lacked them. Overall, according to several real estate experts, new-home buyers during the housing downturn exhibited what’s been termed a “flight to quality,” or a movement to safer, more stable housing investments.

The Sienna Springs Resort pool is the newest water attraction at Sienna Plantation, located in the Houston area. It has a tower at the center and two children’s water slides.

“Buyers were more wary than ever about buying into a distressed community and getting burned,” says Gregg Logan, managing director of RCLCO’s Community Development Practice Group.

Top-selling master-planned communities had the advantage of being fairly well capitalized, enabling their developers to continue investing in the communities even as the economy stalled. In interviews about RCLCO’s top ten–selling communities of 2010, four common strategies and themes stood out about their successes:

– Most communities adjusted and repositioned their housing choices to meet the demands of the changing consumer market. – Most communities also altered their advertising and marketing tactics. – Some communities effectively pursue specific growing demographic niches. – Finally, being in the healthy Houston metropolitan area was an added bonus.

During the housing boom of the mid-2000s, many master-planned communities had mirrored the rest of the housing industry, focusing on building upper-end homes. But once the recession hit, some communities worked diligently to adapt quickly.

Sienna Plantation, for example, began offering smaller lots with slightly lower price points, targeting not the first-time buyer but the first-time move-up buyer, says Doug Goff, chief operating officer of Johnson Development Corp. At Brambleton, located outside Washington, D.C., in Loudoun County, Virginia, developer Soave Enterprises challenged builders to create new architectural styles that could catch buyers’ attention in a competitive marketplace. They responded with, among other things, brownstone townhouses that included big windows and small outdoor porch nooks, says Bill Fox, Soave’s chief operating office of Brambleton.

But perhaps no master-planned community developer put as much effort into creating new products as the Irvine Company, whose Irvine Ranch already encompasses nearly 100,000 acres (40,500 ha) and 300,000 residents. “We started with the premise that more of the same wouldn’t work,” says Daniel Young, the Irvine Company’s president of community development.

The company conducted some unusual research. It gave a couple hundred potential homebuyers $250 gift cards to visit model homes outside the community and rate what they liked or did not like about every room in the house. The company also filmed another 100 families talking about what they liked and did not like about their own homes. All this resulted in a realization that the current floor plans were not working for new buyers.

So in early 2010, Irvine introduced its 2010 New Home Collection with eight models of new homes that included such features as the following: “great rooms” combining the kitchen, living room, and dining room; a roof-covered patio called a “California room”; and a “mud room” space by a door where kids (and adults) can shed dirty clothes and shoes before entering the rest of the house. “We created a new home for a new generation,” Young says. The company signed up more than 1,000 buyers of these new-style homes last year, doubling its goal.

The Cinco Ranch Branch Library opened in 2004 with the help of a community fundraising campaign.

Before the economic downturn, master-planned communities typically used traditional media—newspaper ads and radio spots—to market their brand. But as developers cut back on advertising budgets, they made their marketing more targeted and creative to lure prospective buyers.

Newland Communities, which had two Houston-area developments—Cinco Ranch and Telfair—on RCLCO’s top-ten list, began buying inexpensive ads on real estate websites and school-search websites such as greatschools.net. Elsewhere, communities launched YouTube videos to tell their stories and also stepped up event-driven marketing, holding community social and charity events ranging from festivals to garden club tours—all open to the public—as ways to attract attention and possible future buyers.

In Las Vegas, Focus Property Group’s Providence holds a fall entertainment and crafts festival called Red Apple Days that complements the development’s old-fashioned, small-town America theme. Builders are also on hand offering promotional incentives for prospective buyers. “We find experiential marketing is the most effective marketing,” says John Ritter, Focus Property’s chief executive. “Selling a community these days is very much like how a car is marketed—it’s not so much about the product but how it makes you feel.”

Many master-planned communities offer enough housing styles to have something for everyone, from singles to young families and up through empty nesters. But some successful communities have taken a more customized approach, narrowing the focus to select demographic groups.

The Villages, whose 2,100 sales in 2010 made it the number-one-selling community in RCLCO’s rankings, is a giant age-restricted community outside Orlando that caters just to retirees. That is a popular target market for master-planned developments, but certainly not the only one. In Houston, for instance, Newland Communities’ Telfair pursued the Asian and Indian ethnic segments with homes that could serve multigenerational households, with features ranging from second kitchens to prayer rooms. And in Denver, Stapleton was developed in a new urbanist style, with streets in a grid, homes with front porches, and schools within walking distance, to appeal to urban dwellers.

“We provide the only large-scale opportunity for young Denver residents to buy a new home to maintain an urban lifestyle. Otherwise, they have to go to the suburbs,” says Jim Chrisman, senior vice president for the Forest City Stapleton development company.

RCLCO’s annual rankings used to be dominated by western metropolitan areas. In 2005, for example, Las Vegas had four of the top ten, while Phoenix had five of the top 13. Since 2007, however, Houston has been the dominant metro area for master-planned sales, with four and sometimes five communities ranked in the top ten every year.

According to developers there, the Houston market was not overbuilt during the housing boom, so the new-home market did not dry up, as happened in other fast-growing metropolitan areas. Meanwhile, the oil and gas industry continued to expand and create new jobs, bringing in out-of-towners.

“We’ve gotten the jobs, and they sell houses,” says Tim Welbes, copresident of the Woodlands Development Co., which oversees the Woodlands, a commercial-centered community north of Houston that contains more jobs than households.

Going forward in the housing market, RCLCO’s consumer surveys indicate that a growing share of prospective homebuyers is seeking smaller but more functional residences with more livable outdoor space as well as greater connectivity to jobs, schools, shopping, and recreation. That bodes well for master-planned communities, especially those with progressive management. As RCLCO concluded in its report on the best-selling communities: “The most successful MPCs will continue to be those that are constantly adapting to the changing real estate environment.”

]]>http://urbanland.uli.org/industry-sectors/increasing-home-sales-in-master-planned-communities/feed/0Top 10 States for Low Business Taxes and Regulationshttp://urbanland.uli.org/capital-markets/top-10-states-for-low-business-taxes-and-regulations/
http://urbanland.uli.org/capital-markets/top-10-states-for-low-business-taxes-and-regulations/#commentsThu, 05 Jan 2012 08:37:00 +0000http://urbanland.uli.org/news/top-10-states-for-low-business-taxes-and-regulations/According to the U.S. Chamber of Commerce, states that are now the most business-friendly are inland locales, ranging from Kentucky and Tennessee in the east, westward to Wyoming and Utah.

]]>To jump-start their economies and create more jobs, states increasingly are trying to spur private sector business growth and investment. One way some political leaders are doing this is by reducing business taxes and government regulations. A number of states have taken steps in the last few years to reduce regulatory burdens on businesses, as well as reform tax credit and incentive programs to better reward private investment.

The reasoning behind this strategy is simple: Taxes and regulations affect the decisions and competitive positioning of large and small businesses alike. According to the Tax Foundation, a nonpartisan public policy organization in Washington, D.C., “the most competitive tax systems create the fewest economic distortions by enforcing the most simple, pro-growth tax systems characterized by broad bases and low rates.”

Recently, the U.S. Chamber of Commerce published a report called “Enterprising States 2011” that ranked states in a variety of performance metrics, including their tax and regulatory environments. Those environments were compared in five ways: overall state and local tax burdens, corporate taxes, small-business costs, state government budget gaps, and cost-of-living indices.

States that made the Chamber of Commerce’s top-ten list are not found on the East Coast or the West Coast and, with the exception of Texas, they’re not among the nation’s most populous places. Instead, they’re inland locales, ranging from Kentucky and Tennessee on the east end to Wyoming and Utah on the west end. Desirable coastal states don’t always need incentives to attract business investment and expansion. So states that offer lower taxes and regulations view those attributes not only as advantages but also as necessities in today’s competitive landscape for business expansion and job growth.

The importance of this for Urban Land Institute members relates both to their corporate entities and to real estate development. Locating in or doing business in a low-tax state can help generate higher profit margins, while operating with fewer regulatory and bureaucratic hurdles can reduce red tape in the real estate development process, whether for environmental reviews or incentive programs.

Below are the U.S. Chamber’s top ten states for low business taxes and regulations:

Rank

State

Tax and Regulatory Characteristics

1

Tennessee

Tennessee has the nation’s fourth-lowest state and local tax burden and a low cost of living. A hallmark of the state’s interaction with business is consistency of message and straightforward, understandable taxes and regulations with no surprises.

2

South Dakota

South Dakota has the nation’s most favorable business tax climate, with no corporate income tax or business inventory tax. The state has an extensive array of tax and regulatory statutes aimed at lessening the tax burden on doing business.

3

Wyoming

Wyoming ranks in the top five among all states for business tax climate and for low state and local tax burden. Governor Matt Mead has focused on streamlining government functions, including repealing previous executive orders seen as unnecessary.

4

Alaska

Business expansion, retention, and startups are encouraged by a very competitive tax environment. Alaska’s state government is also fiscally strong, with enough savings to insulate it from fluctuating energy prices.

5

Indiana

The state has turned around its budget situation and has improved government efficiency. A very competitive business tax structure includes a flat 8.5 percent corporate income tax and no gross receipts tax or inventory tax.

6

Texas

The Lone Star State is a low-tax state that offers a low cost of living and has an enterprise-friendly climate that’s paying off with high job growth rates. Recent state initiatives include a business tax reform that raises the revenue exemption.

7

Missouri

The state ranks in the top 20 in all five measured indicators—tax burden, corporate taxes, small-business environment, state budget gap, and cost of living. Missouri has recently enacted reforms in workers’ compensation and tort laws.

8

Kentucky

Kentucky has the nation’s lowest cost of living and recently passed legislation to create a “one-stop” website for business regulatory forms and interactions with state agencies. The state has also made international business trade a government priority.

9

North Dakota

The state’s booming energy industry has led to a sizable state budget surplus. North Dakota is also the only state to own its own bank, which provides a secondary market for real estate and business loans, and its profits help offset taxes.

10

Utah

Utah ranks in the top 17 in four of the five measured indicators (all except state and local tax burden). It has targeted development incentives on several business sectors, including aerospace, defense, life sciences, energy, and financial services.